Why Las Vegas Sands' Second-Quarter Earnings Created a Buying Opportunity

 
Sands has posted incredible growth over the past five years, and this recent dip creates a good entry for Foolish investors.
Photos: Las Vegas Sands, Yahoo! Finance; Editing: Bradley Seth McNew

Las Vegas Sands (NYSE: LVS  ) second-quarter earnings release, a couple weeks ahead of those from competitors Wynn Resorts (NASDAQ: WYNN  ) and MGM Resorts International (NYSE: MGM  ) , disappointed many analysts and investors with revenue and EPS below expectations. The stock is down slightly following the release. However, this is ridiculous and here's why this only presents a buying opportunity for long-term investors.

Las Vegas Sands

Las Vegas Sands missed expectations, despite good results
The expectations had called for $0.90 per share and Sands missed this by $0.05 with $0.85 cents per share, on total revenue of $3.62 billion. Yes, Las Vegas Sands missed expectations slightly, but consider that those expectations formed following record breaking first-quarter results from Las Vegas Sands that were by far the highest in the industry, well ahead of those of Wynn Resorts or MGM Resorts, and the company has much better future prospects as well.

As for the results in this second-quarter earnings release, Las Vegas Sands posted a net income increase of 27% year over year. Investors are scoffing at 27% income growth? That's ridiculous. With net revenue up nearly 12% to $3.62 billion YoY, EBITDA in Macau up 21.9% YoY, and adjusted earnings per share up 29.7% YoY, it seems that analysts got so used to Sands' incredible profit each quarter that this incredible growth left them jaded.

But expectations were priced in, right? Wrong
Shares of Macau-focused gaming companies have been beaten down over the last few months as issues involving regulation and the slowing of the VIP gaming segment had been linked to lower gross gaming revenue at times. Thus, even though Las Vegas Sands, Wynn, and MGM Resorts reported incredible first-quarter earnings, their prices have still not performed very well since April. However, these issues are just noise, not good catalysts for long-term investment analysis.

Sands CEO Sheldon Adelson has led the company to industry-high results, and there are more reasons than ever to continue believing in his guidance. Photo: Bloomberg

Most importantly, some analysts have pointed to the slowing of VIP growth as a negative for the casino growth of Las Vegas Sands and Macau. However, if anything this is a good thing. While Sands and others are losing ground with VIP gamers, they are focusing on the mass-market segment and making massive gains there, which will be the driving force for higher profits in Macau for years to come.

Therefore, if the incredible profits posted in the first quarter have not added much to the stock price of Las Vegas Sands, and the second-quarter expectations have been beaten out of the stock in the noise of week to week gross gaming revenue, then that means the the recent dip following the small miss on EPS expectations presents a buying opportunity for investors who are looking to get in on what remains incredible growth.

Las Vegas Sands won in Q1, likely to win again in Q2
Las Vegas Sands led the field with first-quarter 2014 revenue of a record $4.01 billion, up over 21% year-over-year. MGM Resorts came in a not-so-close second with revenue growth of barely more than half of that of Las Vegas Sands, and Wynn came in third in this group. 

 

Wynn Resorts

MGM Resorts

Las Vegas Sands

Q1 Net Revenue Growth YoY

9.7%

12%

21.4%

Q1 Net Revenue Growth YoY

TBA

TBA

12%

Share Price in April

$219

$24.33

$76

Share Price in July

$204

$25.5

$73.8

P/E (TTM)

27.6 249.8

24.1

P/E est. 2015

21.4

38.7

16.7

Source: Yahoo! Finance

A key reason why Las Vegas Sands has been able to post such huge results is through diversified revenue growth in Asia. Sands' Asian revenue also includes what it collects from its operations in Singapore. Though its Singapore operations did not provide much help this quarter, diversification across the 88% of Las Vegas Sands' revenue that comes from Asia will help the company remain strong and steady. Wynn, by contrast, gets 75% of its revenue from Macau so it lacks the diversification of Las Vegas Sands. MGM only gets 37% of its revenue from Macau, with most of the company's global revenue still coming from Las Vegas and the US Northeast region.


Source: Las Vegas Sands

CEO Steve Wynn introduces the vision for the new resort on the Cotai strip back in 2012. Photo: Reuters

One more reason to believe: The coming casinos
The coming $4 billion Wynn Palace on the Cotai Strip, with an expected opening date within 18 months, is an exciting catalyst for Wynn investors. The brand new resort will include a 1,700-room hotel-casino, a performance lake, and much more. Likewise, MGM is planning its own new casino resort in Macau which will open during the following year, 2016.

Construction progress of Las Vegas Sands' Parisian. Photo: Las Vegas Sands

However, once again Las Vegas Sands is making a bigger bet with an even more impressive resort. The company's new Cotai resort, the Parasian , is set to open in mid-2015 and it will include over 3000 new rooms. Because Las Vegas Sands has done a better job of recruiting mass-market players to come to its casinos, it will need places for those gamers to sleep. This is one more sign that Las Vegas Sands is making bigger bets on the trends that are driving growth in Macau, and will continue to win from these trends over the next few years.

Foolish takeaway
Analysts and investors who were waiting for Las Vegas Sands to have another showing like it had in the first quarter are now disappointed because Sands missed on EPS. However, now that the stock is down slightly following this news, Foolish long-term investors should not miss the buying opportunity that this has created. With strength in mass-market gaming, the new Parisian resort coming online next year, what should still be industry-high revenue growth this quarter after MGM and Wynn report their second-quarter earnings, and most importantly, still very strong second-quarter income growth, Las Vegas Sands still looks like a great bet. 

Investors can bet on future growth with Las Vegas Sands, and with Apple too
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Read/Post Comments (2) | Recommend This Article (0)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On July 22, 2014, at 4:57 PM, 6gunner wrote:

    Brad,

    Good stuff. 100% spot on.

    Here are some other things analysts have been over reacting too.

    1 China's economy slowing down...this is still the fastest growing economy in the world and still has the most potential for future growth.

    2. Growth in the VIP segment slowing...gosh, the VIPs came first and they are still coming. Now we have a huge mass market...much bigger than Vegas.

    3. "new" Anti Corruption campaign...they have one every 3 months....a joke that keeps repeating.

    4. UnionPay Cards. Guess what. They are still using them. Macau authorities corrected the rumor of stopping them.

    Thanks again for a great article.

  • Report this Comment On July 22, 2014, at 7:32 PM, spokanimal wrote:

    Bradley,

    Because your article makes no mention of "normalized" earnings, I can probably assume that the concept is foreign to you, because NO, reasonable, discussion of earnings for gaming companies should exclude the concept.

    "Normalized" earnings basically removes the "Luck" from the company's headline earnings, and since such a company's luck (or hold) can gyrate around from quarter to quarter, and have little to do with their operational ability, you absolutely MUST take it into account.

    For example, once you account for the fact that LVS played "lucky" in Q2, they actually made only 77 cents per share, when you assume "average" luck.

    LVS's blockbuster Q1 earnings of 95 cents per share appeared to CLOBBER their Q4 earnings of just 72 cents...

    ... but normalized for luck, LVS actually earned 87 cents per share in BOTH Q4, and Q1.

    So PLEASE, Bradley... don't write any more articles unless you're willing to portray these numbers in ways that will help your readers to know just exactly HOW the company did, because using "headline" numbers without drawing normalized equvalents is like discussing a retail store's numbers without also portraying them in "same store sales" terms.

    Spokanimal

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