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Why Las Vegas Sands Is Still the Best Bet

Revenue growth in the gambling business, mainly at Las Vegas casinos, has been in steady decline. However, many casino companies have found an alternative to Las Vegas: Macau. Las Vegas Sands (NYSE: LVS  ) is one of those companies. It was the first major casino company to invest in Macau.

Shares of the four major casino operators in Macau were up at least 60% in 2013, but the stock prices of these casino operators have slumped over the last four months. Las Vegas Sands and its three major competitors in Macau, Melco Crown Entertainment (NASDAQ: MPEL  ) , Wynn Resorts Ltd. (NASDAQ: WYNN  ) , and MGM Resorts International (NYSE: MGM  ) , have all seen their stock prices drop at least 5% over the past four months.

Recent weakness in Macau
Macau is the only place in China where gambling is legal, and it is the largest gambling hub in the world. The casinos in Macau have been successful because of the large amounts of cash that Chinese nationals gamble there.

Unfortunately for the casinos, China has been trying to find ways to reduce the amount of cash that Chinese gamblers can get their hands on. Chinese nationals have made a habit of withdrawing large sums of cash from ATM machines with Chinese state-backed UnionPay Cards. The ban is part of the government's initiative to keep money from being illegally taken out of China.

As a result of the Chinese government's new rules to restrict the number of ATMs gamblers can use to get cash, revenue at Macau's casinos have suffered. But investors were able to breathe a sigh of relief toward the end of last month when Macau announced that, while China wanted to strengthen its supervision of large UnionPay card transactions, it would not remove any of the card devices already located within the gaming areas.

Macau will remain a key growth story for the gambling industry going forward. In 2013, gambling revenues in Macau totaled $45 billion, and it is estimated they'll grow to about $70 billion by 2017.

The future for Las Vegas Sands
Even with all this, the outlook for Las Vegas Sands is strong. In the first quarter, the casino had explosive growth; its year-over-year revenues were up 21%, and its net income was up 35%.

Las Vegas Sands is also the largest player in Macau. Las Vegas Sands owns five hotels and casinos in Macau, compared to Wynn Resorts, which owns two, the MPEL Crown, which owns two, and the MGM, which has investments in two. The company's name, Las Vegas Sands, is misleading as its primary source of earnings is in Macau. The casino gets 86% of its revenues from its Macau operations. That gives it a bigger upside than Las Vegas-based gaming stocks like MGM Resorts and Wynn Resorts. MGM gets about 35% of its revenues from China. Meanwhile, Wynn gets just over 70% of revenues from Macau.

How shares stack up
Shares of Las Vegas Sands are down 10% over the last four months. But with a P/E ratio of 25 and P/S ratio of 4.4  , it is a bit more expensive than its peers. But quality growth stocks tend to trade at a premium. MGM trades at a P/S ratio of 1.2, and Wynn trades at a P/S ratio of 3.5.

China's economy will continue to grow, and so will the number of its middle- and upper-class citizens. This should add to the gaming industry's growth and the future growth of Las Vegas Sands. Investors looking for exposure to the Macau casino market should take a closer look at Las Vegas Sands.

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  • Report this Comment On July 16, 2014, at 7:57 PM, spokanimal wrote:

    While it is true that LVS increased it's "headline" EPS by 35% year-over-year, the past 2 quarters of "normalized" earnings portray a much different story in terms of profitability.

    In Q4, 2013, LVS's earnings, normalized for "luck", came it at 87 cents. In Q1, normalized earnings were also 87 cents. Today, they announced normalized earnings at 77 cents for Q2.

    Clearly, the company is growing it's operations and market share in rock-solid fashion over the past year, but it's not being done without some bumps and bruises in terms of true, luck-adjusted profitability along the way.

    I'm not worried, because this company has ALWAYS been the most successfully focused on the bottom line and EBITDA of ALL the 6, gaming concessionaires in macau (you forgot to mention SJM and Galaxy in your article, marshall)...

    ... but during this time when the company is focused on exploiting it's huge, hotel room advantage and converting it to more gaming revenues than any of the other concessionaires, it appears that the focus on profits is taking a temporary back seat.


  • Report this Comment On July 17, 2014, at 2:57 AM, BradleySethMcNew wrote:

    Hi Spokanimal,

    I always appreciate your comments and insight. Thanks and please keep them coming.

    Can you explain your process for normalizing earnings for "luck" that would be different for a casino company than, say, a more traditional entertainment/media company?

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