With stock markets around the world down sharply, the casino and gaming industry has largely defied global economic turmoil. Hot Asian destinations such as Macau and Singapore are offering immense growth potential for gaming companies. This has attracted several casino companies to the region, and as one of the first to build a foothold there, Las Vegas Sands
Sands takeaways
Las Vegas Sands' growth in Asia is definitely worth noticing. In the first half of 2011, a staggering 83% of the company's revenue came from its casinos in Macau and Singapore. So far this year, Macau alone has seen revenue of almost $2.4 billion, up 18% from this time last year. High EBITDA margins -- 33% in Macau and 55% in Marina Bay Singapore -- reflect good operational efficiency.
The company's upcoming Cotai Strip venture is expected to begin operating over the next 16 months, ahead of other competitors. A unique feature of the company is that unlike its rivals, Las Vegas Sands focuses on the mass-market segment instead of the low-margin VIP segment. This seems to help it make money from the less-tapped market.
An increase in hotel occupancy rates, number of air passengers, and revenue per room in the U.S. is also positive for the growth of the company's Vegas business.
Traditionally, investors look at earnings multiples to judge how cheap a stock is. But the P/E ratio is of somewhat limited value when looking at growth stocks like Sands because it only looks at trailing earnings. So I prefer to tie multiples to a company's earnings growth through a metric called the PEG ratio, which is calculated by dividing P/E by the estimated earnings growth rate.
Let's take a look at Sands alongside its industry peers.
|
Company |
Trailing P/E Ratio |
Estimated EPS CAGR for 5 Years |
PEG Ratio |
|---|---|---|---|
| Las Vegas Sands | 33.4 | 39.1% | 0.85 |
|
Melco Crown Entertainment
|
43.5 | 60.4% | 0.72 |
|
Wynn Resorts
|
40.2 | 66.2% | 0.61 |
|
MGM
|
1.7 | 39.0% | 0.04 |
Source: Yahoo! Finance.
Las Vegas Sands is expected to grow earnings quickly over the next five years, but rivals Melco and Wynn are expected to grow even faster.
What I like about the stock is that it is somewhat cheaper than Melco and Wynn on an earnings multiple basis. MGM is unattractively cheap probably because of its weak interest coverage ratio and huge net debt burden of nearly $11.5 billion, which is more than double the company's current market capitalization.
Still, it's disappointing that Sands' PEG ratio is the highest of the four. That suggests that while Sands could be an intriguing play, its valuation is not exactly a blackjack.
The Foolish bottom line
Las Vegas Sands' fundamentals, along with its growth in developing markets, are definitely eye-catching. I would suggest Fools look out for this company by adding it to your watchlist.
