How Low Can Las Vegas Sands Go?

Image: Las Vegas Sands.

Casino stocks are notorious for their huge rises and falls over time, and the current turmoil in the Asian gaming capital of Macau has roiled the entire industry. Macau pioneer Las Vegas Sands (LVS 0.68%) has found itself especially hard hit, with its shares trading at their lowest levels since 2012. Yet even with the Macau market's growth rate looking to establish a new, more sustainable equilibrium, Las Vegas Sands arguably looks a lot stronger than it did in the three to four years since the last time its stock was at its current price. For those who are nervous about just how much more downside the stock could have, here are several reasons why Las Vegas Sands is still poised for a more promising future than many expect right now and therefore why investors should see today's share price as a bargain opportunity.

1. Even with Macau's recent decline, Sands still fares relatively well there.
Whenever a company suffers falling sales and profits, it's easy for investors to panic and lose perspective. Yet even with the high-profile reports of plunging industry revenue in Macau, Las Vegas Sands is still in a stronger position there than it was a few years ago.

In 2011, Las Vegas Sands reported about $4.9 billion in sales from its Macau operations, and they generated a pre-tax operating profit of $1.58 billion. By 2014 -- even after some of the Macau downturn had already taken place -- Macau-based revenue for Sands had nearly doubled to $9.6 billion, and its pre-tax operating profit there had also skyrocketed to $3.26 billion.

As you'd expect, 2015 has seen a substantial drop. But halfway into the year, Macau revenue is still trending to top the $7 billion mark on an annualized basis, and EBITDA of $1.1 billion for the first half of the year represents solid growth in recent years. Even with the magnitude of the decline thus far, it would take even worse performance from the Macau market to justify the decline in Sands' stock price.

2. VIP controversies leave Sands in a better competitive position.
Most of the decline in Macau has stemmed from the collapse of the VIP gaming market. Controversy involving the junkets that bring these lucrative players to the gambling tables has led to a crackdown from the Chinese government, and recent events involving allegations of theft among junket operators show how the industry needs to evolve toward a greater reliance on a mass-market audience.

Las Vegas Sands has been at the forefront of the move toward greater emphasis on the mass market, with its convention, hotel, and entertainment experience giving it a competitive advantage over its peers in moving forward with more all-inclusive plans for its future. The soon-to-open Parisian Macau will feature not only the usual assortment of table games and slot machines but also 3,000 hotel rooms and suites, a retail mall, and a half-sized Eiffel Tower replica. Combined with the growing opportunity to bring conventions and other business travelers to Macau, Sands is working hard at staying on top of the industry.

3. New growth opportunities won't disappear.
Las Vegas Sands has demonstrated its ability to move first and establish new markets from the ground up, as it did both in Macau and with its Marina Bay Sands resort in Singapore. Other countries in Asia, including Japan and Korea, have expressed interest in exploring the possibility of adding destination casino resorts of their own, and Sands will have the inside lane to take advantage of those opportunities when they arise.

Obviously, a regional economic slowdown could make countries reluctant to make big moves into gaming at what could prove to be the worst possible time. Nevertheless, when the economic tides eventually turn, those projects have a good chance of moving forward. Sands has set the stage to be involved in that conversation when it occurs, and the long-term result could be an even greater piece of the Asia-Pacific gaming-industry pie.

Las Vegas Sands unquestionably faces a big challenge from Macau right now, and given how investors have misconstrued much of the negative news in the industry, Sands stock could fall even further. Yet from a fundamental standpoint, Las Vegas Sands looks like an increasingly attractive value play for those willing to take on the risk that Asia's gaming industry won't recover as quickly as hoped. At its current levels, it would take a 2008-style financial crisis to justify a much bigger decline in Las Vegas Sands stock than the casino giant has already seen.