Across from the Sands Cotai, the Parisian will help Las Vegas Sands continue to dominate the Cotai Strip. Photo by the author.
Las Vegas Sands (LVS -0.63%) has weathered a tough few months. Following recently reported third-quarter earnings, in which declining year-over-year revenue again missed analyst expectations, is it time to worry about Las Vegas Sands' future and the future value of this stock?
Las Vegas Sands stock rose nearly 5,000% from its March 2009 low of $1.77 per share to its over-$87-per-share peak in March of this year. It's the best growth story in the industry, ahead of Wynn Resorts (WYNN -0.47%) and MGM Resorts International (MGM -1.24%). Now that those Las Vegas Sands shares are back down roughly 30% to the low $60s, this might be a great buying opportunity. Here's why declining third-quarter revenue shouldn't worry investors too much now, and why this might be the right time to bet on Las Vegas Sands.
Q3 earnings weren't so bad (and neither were Q2 earnings)
In all, Las Vegas Sands' third-quarter earnings weren't bad. Though revenue declined 1% year over year, an EBITDA increase of 0.6% total, 3.2% in Macau alone, as well as cost controls, still allowed the company to post adjusted earnings per share growth, up 2.4% year over year. Wynn and MGM will report third-quarter results in the coming weeks, but just as in the first two quarters of the year, expect Las Vegas Sands to report the highest income growth.
Furthermore, more mass market wins, regrowth in Singapore, and strong increases in non-gambling revenue throughout Singapore and Macau are positioning Sands for significant future growth. In addition, the company will be returning more value to shareholders via a 30% increase in dividend payouts (from $2.00 per share per year this year to $2.60 per share per year in 2015). Additionally the company announced a plan for increased share buybacks, authorizing an additional $2 billion worth of repurchases in the coming quarters, following $1.43 billion of shares repurchased already year to date.
Las Vegas Sands collects nearly two-thirds of its global revenue from its properties in Macau, so it's not surprising that a few tough months in the Chinese special administrative region would be felt in Las Vegas Sands' revenues during the quarter. Still, for the year to date, Las Vegas Sands is posting higher revenue and income, more than 22% higher during the nine months ended Sept. 30 than the same period a year ago. Sands has also posted higher revenue and income growth than competitors during 2013 and the first half of this year.
Why the industry has struggled in the past six months
Las Vegas Sands isn't the only company to have been hammered by a tough second and third quarter in Macau, but with the largest bet there of all major U.S. gaming companies, it was hit the hardest. A slowing Chinese economy, the new partial smoking ban on Macau casino floors, the World Cup, and the protests in Hong Kong have all been named as part of the reason for Macau's lowered revenue over the summer months.
The biggest shift leading to lowered revenue for Macau-focused gambling companies is the falling VIP segment. With a crackdown on junket operators, the middleman companies that bring in high-net-worth gamers, usually from mainland China and often with shady loan schemes, it makes sense that this segment is feeling the squeeze.
However, long term, this is a good thing for Macau. As the VIP segment is diminishing, the mass market segment is growing. This paves the way for long-term growth and more stability for all companies in Macau, especially Las Vegas Sands.
What the future could hold
This switch to a mass-market focus will be the growth driver for the region going forward. Not only is the total number of visitors to Macau continuing to increase, but new transportation advances, including a bridge from Hong Kong to Macau (usually players come to the island by ferry from Hong Kong) and a monorail system covering Macau, will also make it easier for these mass-market gamers to get to the resorts.
Las Vegas Sands in recent years has emphasized Macau's mass-market clientele, and the company is increasing that focus now. During the third quarter, Sands' mass-market revenue increased nearly 15% year over year in Macau, and 7% in Singapore.
Progress on The Parisian as of Q3 2014. Source: Las Vegas Sands.
The Cotai Strip in Macau is already dominated by Sands' holdings. Las Vegas Sands newest resort under construction there, The Parisian Macau, is slated to open in late 2015/early 2016. This massive integrated resort, featuring an additional 3,000 hotel rooms and suites, about 450 gaming tables, 2,500 slots, a retail mall, and a replica of the Eiffel Tower at 50% scale, will help Sands to continue making a huge bet on Macau's mass-market growth.
Las Vegas Sands CEO Sheldon Adelson is still bullish on Macau for the long term, saying last week, "All things in life are cyclical." He said this slump in Macau will turn around, and he remains excited to be a part of the Macau growth.
Foolish takeaway: Low prices might make a great bet now
Las Vegas Sands' stock has struggled, but the company has a lot to look forward to with the planned opening of The Parisian in Macau possibly next year, higher growth in Singapore, more nongaming revenue in both Macau and Singapore, and potentially new resorts in South Korea, Japan, and Vietnam in the next few years. With all of this future growth potential, and so far still the most impressive earnings in the industry throughout this year regardless of the latest numbers, Las Vegas Sands looks like a very attractive bet.
