Shares of Las Vegas Sands (LVS +1.66%) tumbled on July 2 after the latest gaming numbers from Macau missed analysts' estimates. The region's gross gaming revenue (GGR) rose 12.5% year over year to 22.49 billion patacas ($2.78 billion) in June, according to the Gaming Inspection and Coordination Bureau, but missed expectations for 18.5% growth.
The miss was mostly attributed to a tough comparison to the region's 25.9% growth last June, and a modest impact from the World Cup, which lured away potential visitors. Nonetheless, Macau's year-to-date gross gaming revenue still grew 18.9% year over year to 150.2 billion patacas ($18.6 billion), compared to a gain of just 17.2% in the first half of 2017.
Image source: Las Vegas Sands.
So is this just a one-time speed bump? Or does it indicate that the growth of Sands' hottest market -- which generated over half of its hold-normalized adjusted property EBITDA last quarter -- is peaking?
The analysts aren't worried
Many analysts told investors to take the June GGR numbers with a grain of salt. Union Gaming analyst Grant Govertsen stated that he was "not concerned" about the deceleration since the slowdown mainly occurred during the last week of June. Govertsen noted: "... Macau has bad weeks all the time and one bad week doesn't make a trend."
J.P. Morgan analysts DS Kim and Sean Zhuang stated, "The miss was partly driven by elevated estimates, as the Street had hastily revised up numbers during the month..." (from 13% to 18%) in response to "upbeat channel checks from industry consultants." Deutsche Bank analysts Carlo Santarelli and Danny Valoy noted that the industry channel checks were also "incorrect last month," which caused similar last-minute revisions.
Of the 21 analysts covering Las Vegas Sands, 11 rate it a "buy", one rates it "overweight", and nine rate it a "hold". None of the analysts have an "underweight" or "sell" rating on the stock. Their average price target is $82.42 -- which implies a potential gain of 16%.
Understanding Sands' Macau business
Investors should always look beyond analyst opinions and dig deeper into a company's core business. Let's take a moment to analyze Sands' Macau business, which is mainly based in the Cotai Strip, a newer region of Macau that hosts the city's biggest casino resorts.
Here's how fast Sands' Cotai properties (Venetian Macao, Sands Cotai Central, Parisian Macao, and Four Seasons/Plaza) grew relative to its older Sands Macao casino and ferry operations (in central Macau) last quarter.
|
Year-over-Year growth: |
Revenue |
Adj. Property EBITDA |
|---|---|---|
|
Cotai properties |
20.5% |
30.6% |
|
Sands Macao |
(13.5%) |
(13%) |
|
Ferry and other operations |
2.6% |
(42.9%) |
|
Total |
16.8% |
26% |
Source: Las Vegas Sands first quarter report.
Sands' fiscal year is aligned with the calendar year. Therefore, its 16.8% revenue growth in Macau easily outpaced the region's 13.8% year-to-date GGR growth through the end of April.
The slower growth of Sands Macao and its ferry operations throttle Sands' overall growth, but those businesses (which are in the same harbor area) help connect visitors from Hong Kong to Macau. Free buses from the ferry terminal then take visitors to the Venetian and Parisian in Cotai. Therefore, Sands Macao and the ferry terminal could almost be considered "loss leaders" that help the company maintain control over the city's entrance.
Image source: Las Vegas Sands.
Sands also notes that the new Hong Kong-Zhuhai-Macau bridge, which will allow visitors to drive or take buses to Macau instead of taking the ferry, will boost its casino traffic over the next few quarters.
The company is also developing 280 new luxury suites in a tower adjacent to the Four Seasons, 370 new tower suites in the St. Regis Macao tower (in Sands Cotai Central), and the Londoner Macao, which will complement the Venetian and Parisian as its third European-themed resort in Cotai. These projects, which will be completed between 2019 and 2020, should widen Las Vegas Sands' moat against Wynn (WYNN +2.73%), which only owns two properties in Macau.
It's still the best overall play on Macau
Sands' position as the world's largest casino company and the biggest player in Macau still makes it a "best in breed" play on the region's growth. For comparison, Wynn has been kneecapped by leadership and branding issues since its former CEO's fall from grace, while MGM has less exposure to Macau than either rival.
At around $71, Las Vegas Sands stock trades at 20 times the company's projected 2018 earnings. That's a reasonable multiple compared to its projected earnings growth of 19% this year. Wynn admittedly looks cheaper, since analysts expect 52% earnings growth this year and its stock trades at just 19 times this year's earnings.
However, Wynn faces tougher long-term headwinds than Sands, and its forward dividend yield of 1.8% is lower than Sands' 3.9% yield. Therefore, I believe that Sands' valuation, dividend, and best-in-breed position in Macau should help the stock rebound -- once the near-term concerns about Macau's growth fade.
