A Bright Future for Las Vegas Sands

On Thursday, gaming giant Las Vegas Sands (NYSE: LVS  ) delivered better-than-expected top- and bottom-line numbers based on tremendous gains in the new gaming mecca of Macau. The company continued its impressive run in the industry, and even raised next year's dividend by a juicy 43%. The world's largest casino owner and operator, Las Vegas Sands looks set to push onward and upward with its latest multibillion-dollar casino coming online sometime in 2015 -- also located in Macau. The company's recovery through the last couple of quarters has its stock on the must-have list of many analysts. That being the case, the contrarian opinion may suggest that its growth is fully valued, and investors not already in on this runaway winner may be too late.

Earnings recap
While Wall Street was expecting just a 65% increase in earnings per share, Las Vegas Sands delivered $0.82 per share -- a 78% gain over the prior year's quarter. Top-line sales, projected to grow 28%, leapt up to $3.57 billion, or 32% more than last year.

Macau was the big winner, as was expected, with the Chinese territory yielding sales gains of 43%. The company is working on the fifth of its Macau casinos, all of which are worth many billions. Vegas revenue rose as well, though not as attractively.

Adjusted property EBITDA in Macau hit record levels at $784.3 million, up more than 60%. On the same basis, Macau represented roughly 61% of the company's total take. The end-of-the-day cash flow is what is driving the company and its stock to new highs. Being in the cash-rich business of casinos, Las Vegas Sands has the ability to invest heavily in new assets, such as the Parisian in Macau, while paying a substantial dividend and buying back stock. For the coming year, the company will pay an annual $2-per-share dividend. Las Vegas Sands bought back slightly less than $300 million worth of stock at an average price of $65.18 per share -- a discount of about 8% to today's price.

Room bookings and other revenue are growing comfortably, but it appears to be the casinos' pits that are really driving the numbers higher.

There is no doubt these numbers will continue to grow, especially when the fifth casino opens its doors. The question is, has the market priced in the growth at this point?

Valuation comments
Las Vegas Sands trades at a little more than 20 times its forward projected earnings. The company's trailing-12-month return on assets is just under 8%. For comparison, take a look at Wynn Resorts (NASDAQ: WYNN  ) . Wynn is a much smaller business ($17 billion market cap versus nearly $60 billion for LVS), but doing much the same thing as Las Vegas Sands -- putting the chips on Macau and Cotai for growth. Wynn trades at more than 23 times forward earnings, but holds a higher return on assets at 9.38%. Return on equity is more than 200%, while Las Vegas Sands earned 25%.

The market appears to give Sands a slight discount given its lack of performance several quarters back, and perhaps due to its less favorable historical return on investment. Looking forward, though, things should continue to improve for Sands -- potentially earning it a multiple more in line with Wynn.

Both companies are compelling growth picks, though neither are available to investors at a meaningful discount. Investors interested in Sands should keep their focus on the gaming growth in Macau -- both macro-level and company-specific. So far in October, the region shows stronger-than-expected growth even in the face of severe flooding. Although over time that growth will subside, it should be enough to carry valuations for the foreseeable future.

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  • Report this Comment On October 18, 2013, at 5:22 PM, spokanimal wrote:

    Regarding the "contrarian opinion" quote in your opening paragraph, I hear where you're coming from. It's hard to guage this as a contrarain position when "momentum" has been the dominant theme this year. As a contrarian investor, stocks like LVS can give me heartburn sometimes.

    The saving grace, is the forward PEG ratio.

    LVS's 2014 P/E is looking to be in the 20 range, with it's price-to-EBITDA 2014 looking to be even better than that (it's hard to argue for inclusion of "depreciation", when it's Macau facilities are clearly "appreciating" in value).

    That said, does it's likely growth in 2014 and 2015 look to be likely to exceed that? I say that it will, with excellent transparency.

    I don't want to get into a lengthy discussion, but here are some key words:

    Infrastructure improvements, Parisian, mass gaming growth vs VIP, Venetian overhead absorption, cotai central ramp up, migration of patronage to cotai from downtown, Japan, central cotai location (adjacent to all cotai resorts), hotel room dominance, pending sale of appreciated non-core assets, dividend growth, stock buybacks, possible MBS non-gaming expansion, concessions for spain, macau supply constraints, no new cotai resorts until 2016 except galaxy phase 2 and Parisian (& maybe Studio City, which has no gaming license yet).

    Hope this helps,

    Spokanimal

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