Shares of Las Vegas Sands (NYSE:LVS) rallied nearly 20% this year, but the stock seemingly stalled out after hitting a multiyear high of $66 in mid-June. Is the casino giant running out of steam, or is it merely taking a breather? Let's examine the bear and bull cases to decide.
Why Las Vegas Sands is running out of steam...
Las Vegas Sands faces a lot of challenges in Macau, which generates over half of its adjusted EBITDA. Gaming revenues in Macau rose annually for the 11th straight month in June, but its 26% growth missed analyst expectations for 30% growth.
That miss was partly attributed to President Xi Jinping's visit to Hong Kong, which accompanied an accelerated crackdown on corruption and money-laundering practices in Macau.
A top prosecutor in Macau was recently found guilty of corruption. To limit the amount of cash flowing into Macau, ATM withdrawals are now capped, some ATMs were upgraded with facial recognition features, and others were simply removed.
Sands still generated 11% of its profits in Macau from VIP players -- and that percentage remained unchanged from the prior-year quarter. This is problematic because regulators are aggressively probing the junket operators that bring VIPs to its casinos.
The cooling housing market in China is causing additional problems for some VIP players, who often use real estate as collateral for gaming loans. Smoking bans, which will be enforced at Macau's VIP tables in 2019, could exacerbate that pain.
The competition in Macau is also heating up, with Wynn (NASDAQ:WYNN), MGM Resorts (NYSE:MGM), Galaxy Entertainment, and SJM all opening new properties in Macau's Cotai Strip. These new rivals could throttle Sands' market share growth over the next few years.
Why Las Vegas Sands is taking a breather...
Despite those near-term challenges, Wall Street still expects Sands' revenue and earnings to respectively rise 9% and 12% this year. That growth should hold steady as long as the Chinese government's saber-rattling doesn't escalate into full-on stabbing.
Wynn, which faces easier year-over-year comparisons than Sands, is expected to post 31% sales growth and 41% earnings growth this year. MGM, which has the least exposure to Macau, is expected to post 16% sales growth and 11% earnings growth this year.
Those numbers don't paint a picture of a dying industry. Moreover, Sands' P/E of 27 remains much lower than the industry average of 114 for resort and casino operators.
Investors should remember that Xi's "anti-corruption crackdown" started three years ago. Sands' annual revenue fell in 2015 and 2016, but it's expected to rebound this year and keep rising in 2018. Macau's gambling revenue should also keep growing, with Nomura Instinet recently hiking its growth forecast for July from 25% to 28%.
Sands faces plenty of challengers in Macau, but its share of the region's adjusted property EBITDA actually rose from 28% in 2012 to 36% in 2016. The combined share of its five rivals (Wynn, MGM, Galaxy, SJM, and Melco (NASDAQ:MLCO)) fell from 72% to 64% during that period. Sands also continues dominating the Cotai Strip, as seen in the following map:
Sands still has plenty of growth opportunities in other countries. It plans to spend up to $10 billion on a new casino resort in Japan, and the new king of Thailand might reconsider the legalization of casinos again. It's also reportedly interested in opening casinos in Brazil to revive its troubled economy.
My verdict: It's taking a breather
Selling Las Vegas Sands before the anti-corruption crackdown started in 2014 was probably a wise move. But ignoring the stock when Macau's gambling revenues returned to growth over the past year is just silly.
Selling it now doesn't make much sense either, since plenty of tailwinds could lift the stock to fresh highs. The stock might tread water thanks to near-term regulatory concerns, but investors can still earn a hefty dividend yield of about 4.7% for their patience.