Analysts at Credit Suisse reiterated their "outperform" rating on Las Vegas Sands (LVS 2.42%) in late November despite continued headwinds in Macau, a gambling mecca off the coast of China, and a further decline in the company's stock price. I believe Las Vegas Sands deserves this positive outlook and is undervalued for the long term. To find out why, let's see why the stock has been beaten down, and why this could be a good opportunity for value investors.
A dropping tide lowers all ships
Mainland Chinese government restrictions on travel to Macau as part of a campaign to curb illicit activity by high-net worth individuals decimated Macau's VIP segment (which made up the large majority of Macau's gaming revenue in recent years) over the last 15 months.
Shares of Las Vegas Sands, Wynn Resorts (WYNN 2.62%), and Melco Crown (MLCO 0.33%) have suffered as a result. MGM Resorts International (MGM 0.02%) is the one company spared thanks to its comparatively minor exposure to Macau.
Short-term pain, long-term opportunity
Credit Suisse analyst Joel Simkins noted in the report that there are still more negatives than positives in Macau right now, including further pressure on the VIP segment. He is nevertheless optimistic about Las Vegas Sands' long-term prospects, so long as it can weather the current storm. The report reiterated Las Vegas Sands' outperform rating based on its "enviable competitive position," which, in turn, seems to be predicated on two things.
First, it's the best bet on Macau's transition to a less-VIP focused gambling hub. Macau made the bulk of its money over the last decade on VIP gamblers, but that's exactly what the Chinese government is seeking to curb with the travel restrictions causing Macau's current pain. October was the first month that mass market revenue in Macau was higher than VIP gaming revenue, and this trend continues to gain momentum.
Las Vegas Sands has a reasonable shot at benefiting from this, with more properties than any other company (five compared to two for Melco Crown and one for each MGM and Wynn). This translates into more hotel rooms as well as more square footage dedicated to retail space, both of which could prove to be lucrative when aimed at the mass market. Las Vegas Sands also has a new resort opening in early 2016 that will broaden its lead in these areas.
Image credit: Las Vegas Sands.
Second, Las Vegas Sands is better diversified than most of its peers. Its property in Singapore, Marina Bay Sands, continues to drive growth for the gaming company, partially making up for the issues in Macau. In the latest quarter, Las Vegas Sands' Singapore operations adjusted property EBITDA (calculated as EBITDA attributable to that single property without factoring in the company's corporate expenses) was up 10.8% year-over-year.
Las Vegas Sands is also working to build resorts in places like South Korea, Vietnam, and Japan more aggressively than its peers. Melco Crown does have a new resort in the Philippines, but it pales in comparison to Marina Bay Sands in Singapore.
In short, the path forward for the gaming industry won't be uneventful, but Las Vegas Sands seems to me like a compelling bet for long-term value investors.
