Prior to visiting a casino, your adrenaline spikes, you anticipate positive results, and you feel alive. If you play table games, then in most cases, you leave with your head hung low, feelings of depression, and a temporary hatred for life. What you might not realize at the time of your visit is that losing a few hundred dollars isn't going to change your lifestyle. The real risk doesn't come with your visit to a casino, but with your investment in a casino.
Looking for profits in all the right places
Las Vegas Sands (NYSE: LVS ) owns several properties in China, including Sands Macao, The Venetian Macao, The Plaza Macao, the Four Seasons Hotel Macao, and Sands Cotai Central. This is in addition to the company's Marina Bay Sands property in Singapore, and its U.S. properties, The Venetian and The Palazzo in Las Vegas, and Sands Bethlehem in Pennsylvania.
The Sands Cotai is the center point of the Cotai Strip, and it's designed as its own small city. While there is a lot on offer at this location, it's similar to other Macau casino properties in that 86.5% of its revenue comes from gaming. Therefore, regardless of all the bells and whistles, it really comes down to gambling.
There are two ways to look at this. On the positive side, in the Chinese culture, many people are gamblers for life, and they're likely to gamble regardless of economic conditions. On the negative side, recreational gamblers still have a significant impact on results, because all of those bells and whistles at Macau properties help drive them to the property. If the Chinese economy falters, then demand will fade.
With that in mind, there is much debate about the direction of the Chinese economy, which plays a big role for Las Vegas Sands. You can spin this argument in many ways, but it seems clear that the Chinese economy is growing, only not at the same pace as in recent years. You also have to be concerned about the non-regulation of public companies and cities being built to show growth, even though no one is living there.
That said, demand in Macau remains high thanks to extremely low supply. Macau is the only place that you gamble legally in China. When Las Vegas was the only game in town, it had no problem attracting visitors, regardless of economic conditions. However, central banks didn't pump liquidity into the system at the rate they do today, which presents greater risk for the global economy now than in the past -- we don't know how the real economy will react when that liquidity is removed.
For now, Macau is doing well, and without it, most casino-resort companies would be in dire straits. While Las Vegas Sands is an American company, approximately 85% of its revenue comes from Asia. But Las Vegas Sands isn't the only player in the game.
Betting on luxury
Las Vegas Sands definitely aims to impress its visitors. This is evidenced at many locations, including its SkyPark atop its Marina Bay Sands where you can swim in a rooftop infinity pool or enjoy astonishing views while snacking at The Chocolate Bar. The renaissance Venice theme at The Venetian, and the modern Europe theme at The Palazzo, are nothing to sneeze at, either. However, when it comes to luxury, it doesn't compare to Wynn Resorts (NASDAQ: WYNN ) .
That might have sounded like a positive for Wynn Resorts, but that's not really the case from an investing standpoint. Wynn favors the high-end consumer, or VIP player, which means Wynn Resorts has to rely on external economic conditions more than Las Vegas Sands. Sure, Wynn Resorts can charge more per room, and the gamblers bet more per hand, but all of that goes away very quickly if the economy falters. Those high-end consumers will cut costs, and one of their first cuts will be gambling in Macau.
Though it might sound immoral, Las Vegas Sands might have a little more downside protection because "passionate" gamblers aren't as likely to be affected by external economic conditions. However, this is only on a relative basis. Las Vegas Sands is still highly sensitive to external economic conditions and the health of the consumer, whether in Macau, Singapore, or the United States.
Betting on Las Vegas
Las Vegas Sands has exposure to Las Vegas, but not nearly at the level of MGM Resorts International (NYSE: MGM ) , which operates approximately 30% of the rooms on the strip.
If you want to bet on Las Vegas, then you can do so through MGM Resorts but this probably wouldn't be a good idea. The middle-income consumer has weakened due to lower wage growth, increased payroll taxes, and higher gas prices. At the same time, the high-end consumer might be completing its celebration at some point over the next year. The high-end consumer has done well partially in thanks to stock and real estate appreciation.
But with the potential of a Fed taper and rising interest rates, in addition to the cooling of the housing market, an upcoming debt ceiling debate, and a change to the Federal Reserve chairman, a lot is up in the air at the moment. We might not be at the top, but we're certainly much closer to the top than the bottom. This, in turn, doesn't bode well for Las Vegas casino resorts since discretionary income is likely to decline, not increase in the near future.
Mr. Market is capable of anything, but if you look at the Las Vegas Sands story from a logical perspective, then you're essentially betting on continued growth in Macau without that growth being affected by a likely economic slowdown in the United States. Perhaps I'm wrong, but to me, this isn't a bet worth making at the current time.
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