Shares of Las Vegas Sands (LVS 0.52%) have slipped about 7% after hitting a multi-year high of $66 in mid-June. That decline was caused by a crackdown on corruption and money laundering in its top market Macau, a slowdown in VIP spending, and tougher competition.
Sands' second quarter earnings crushed analyst expectations in late July, but the stock remained weighed down by the aforementioned concerns. Nonetheless, I believe that Las Vegas Sands still has room to run for four simple reasons.
Source: Las Vegas Sands.
1. It's still the best Macau play
Las Vegas Sands was the first U.S. company to open casino resorts in Macau. Last quarter, its five major properties in Macau (Sands, Venetian, Plaza, Sands Cotai Central, and the Parisian) generated half of its adjusted property EBITDA.
As seen in the following map, Sands' Cotai properties dominate the heart of the Cotai Strip, while rivals like MGM Resorts (MGM -0.35%) and Wynn (WYNN -0.09%) are mostly pushed off toward the side streets.
Source: Las Vegas Sands Investor Presentation.
Macau's total gaming revenue rose 29% annually in July, marking the company's 12th straight month of year-over-year growth. That growth rate will eventually slow down, but it's unlikely to turn negative anytime soon -- so Sands' revenues should continue rising.
2. It still has room to grow
That's why Wall Street expects Sands' revenue and earnings to respectively rise 10% and 18% this year. Wynn is expected to post 35% sales growth and 45% earnings growth this year, but it faces easier year-over-year comparisons than Sands.
VIP profits (which are more vulnerable to government crackdowns) still generated 12% of Sands' Macau profits over the past 12 months, but the company has diversified its business to offset that weight. 47% of its profits came from mass tables -- a "safer" market, which has been growing with higher visits from middle class Chinese gamblers and tourists -- while the rest comes from its hotel, mall, and slot machines.
3. It has a visionary leader with long-term expansion goals
Las Vegas Sands co-founder and CEO Sheldon Adelson already transformed Las Vegas, Singapore, and Macau with his company's casinos, but he plans to expand further with casinos in Japan and other overseas markets.
The Infinity Pool atop the Marina Bay Sands in Singapore. Source: Las Vegas Sands.
Japan legalized casinos last year, and is expected to set official rules this fall. Many of the guidelines are still murky, but it's believed that the government will introduce strict laws -- including an age limit of 20 for potential gamblers.
Nonetheless, Adelson has stated that Sands could spend up to $10 billion on a new integrated resort in Japan -- which would dwarf the $6 billion it spent on the Marina Bay Sands in Singapore. Doing so would be costly, but it could be a shrewd long-term move which would diversify its business away from Macau.
4. A generous dividend and a reasonable valuation
Las Vegas Sands currently pays a forward yield of 4.9%, and it's hiked that dividend annually for four straight years. That's much higher than Wynn's 1.6% yield and MGM's 1.4% yield. Over the past 12 months, Sands spent 143% of its earnings on that dividend. That might seem unsustainable, but those payments used just 89% of its free cash flow during that period -- so it won't slash its dividend anytime soon.
Sands currently trades at 24 times earnings, which is much lower than the industry average P/E of 59 for resort and casino companies. Wynn and MGM respectively trade at 51 and 19 times earnings. MGM looks cheaper, but it also has the lowest overseas exposure of the "big three" casino giants.
The key takeaways
Las Vegas Sands isn't ideal for conservative investors since near-term concerns about Chinese regulators or a potential slowdown in Macau could cause a lot of volatility. However, I believe that it's still a great long-term play on the growth of China's middle class and increased tourism across Asia -- so I don't plan to sell my shares anytime soon.
