As the world's third-richest person and most celebrated investor, Warren Buffett attracts a lot of attention. Thousands try to glean what they can from his thinking processes and track his investments.
We can't know for sure whether Buffett is about to buy Las Vegas Sands
Writing in a recent 10-K, Buffett lays out the qualities he looks for in an investment. In addition to adequate size, proven management, and a reasonable valuation, he demands:
- Consistent earnings power.
- Good returns on equity with limited or no debt.
- Management in place.
- Simple, non-techno-mumbo-jumbo businesses.
Does Las Vegas Sands meet Buffett's standards?
1. Earnings power
Buffett is famous for betting on a sure thing. For that reason, he likes to see companies with demonstrated earnings stability.
Let's examine Las Vegas Sands' earnings and free cash flow history:
Source: S&P Capital IQ.
Las Vegas Sands had a difficult time generating earnings and free cash flow over the past five years, largely because of the economic downturn and some hefty capital expenditures. But profits have been recovering over the past few years.
2. Return on equity and debt
Return on equity is a great metric for measuring both management's effectiveness and the strength of a company's competitive advantage or disadvantage -- a classic Buffett consideration. When considering return on equity, it's important to make sure a company doesn't have an enormous debt burden, because that will skew your calculations and make the company look much more efficient than it is.
Since competitive strength is a comparison between peers, and various industries have different levels of profitability and require different levels of debt, it helps to use an industry context.
|
Company |
Debt-to-Equity Ratio |
Return on Equity |
5-Year Average Return on Equity |
|---|---|---|---|
| Las Vegas Sands | 100% | 20% | 6% |
| MGM | 135% | 50% | (9%) |
| Wynn | 109% | 24% | 15% |
| Melco Crown | 82% | 7% | (6%) |
Source: S&P Capital IQ.
Historically, Las Vegas Sands has generated decent returns on equity. It employs industry-average leverage.
3. Management
CEO Sheldon Adelson has been at the job since 1988.
4. Business
Gambling isn't particularly susceptible to technological disruption.
The Foolish conclusion
So is Las Vegas Sands a Buffett stock? Probably not. While it has tenured management and operates in a technologically straightforward industry, it doesn't yet exhibit the other characteristics of a quintessential Buffett investment: consistent earnings and high returns on equity with limited debt. However, if you'd like to stay up to speed on Las Vegas Sands' progress, simply add it to your stock watchlist. If you don't have one yet, you can create a watchlist of your favorite stocks.
