The Motley Fool has been making successful stock picks for many years, but we don't always agree on what a great stock looks like. That's what makes us "motley," and it's one of our core values. We can disagree respectfully, as we often do. Investors do better when they share their knowledge.
In that spirit, we three Fools have banded together to find the market's best and worst stocks, which we'll rate on The Motley Fool's CAPS system as outperformers or underperformers. We'll be accountable for every pick based on the sum of our knowledge and the balance of our decisions. Today, we'll be discussing Las Vegas Sands
Las Vegas Sands by the numbers
Here's a quick snapshot of the company's most important numbers:
Result (most recent available)
|Net Income||$1.6 billion|
|Adjusted Property EBITDA||$3.8 billion|
|Market Cap||$27.7 billion|
|Cash / Debt||$3.52 billion / $9.37 billion|
|Key Properties||The Venetian Las Vegas, The Venetian Macau, Marina Bay Sands, Sands Cotai Central|
Sources: Las Vegas Sands earnings releases
Note: All numbers are trailing 12 months.
Since the bottom of the market in 2009, gaming stocks have been on a tear, with Las Vegas Sands leading the way. After nearly going bankrupt and being saved by CEO Sheldon Adelson, the company has made incredibly profitable investments in Macau and Singapore that have benefited investors who had the guts to buy at the bottom and stick with the stock.
The question for investors today is whether the current price the stock is trading at is still a value considering the potential Las Vegas Sands has today, not the potential it had three years ago. I'll start with the downside.
Gaming stocks, including Macau-centric Las Vegas Sands, Melco Crown, and Wynn Resorts, have been beaten up recently on worry that the Chinese economy is slowing and Macau growth will slow as well. In fact, it isn't so much a worry, but a fact. The chart below shows Macau gaming revenue since the beginning of 2011, and you can see the growth trajectory slow dramatically. The gaming win in June was actually the lowest we've seen since November, showing that players are holding back.
Source: Macau Gaming Commission.
In Singapore, the shine is wearing off Marina Bay Sands already. Room rates are high, but gaming has slowed down, leading to a big drop in EBITDA. The second quarter generated just $330.4 million in EBITDA, down 30% from last quarter and 19% from a year ago. Bad luck played a role, but not enough to deny the big drop in performance.
Las Vegas properties have become an afterthought for Las Vegas Sands and the other operators in Macau, so that's a drag as well. Companies like Caesars Entertainment are fighting for survival, just as Las Vegas Sands would be if it only owned The Venetian in Las Vegas.
Now that the red flags are out of the way, we can focus on the good stuff. Las Vegas Sands owns best-in-class properties in both Macau and Singapore and is one of the most efficient operators in the industry. If Macau and Singapore grow, Las Vegas Sands will be able to scoop up more revenue. The company is also creating its own little world on the Cotai Strip with The Venetian, Sands Cotai Central, Four Seasons Macau, and eventually Parcel 3. No company can match the synergies these properties could have.
The opportunity for Las Vegas Sands is huge; that's not what's in question. What is in question is if all of the good news is baked into the stock already. With a trailing EV/EBITDA multiple of 9.5 and challenging dynamics playing out in Asia right now, I think the price is just too high, despite what Sands Cotai Central could add. By comparison, Melco Crown has an EV/EBITDA multiple of 7.0, and Wynn is at 8.0. We also have to consider that high-rollers account for most of Macau's gaming revenue, and the tides can turn quickly in a downturn. If China catches a cold, Las Vegas Sands will get measles.
With that said, shorting the stock could end in disaster if this volatile industry has any good news, so I'm not advocating for an underperform call. I'd like to put a limit outperform call in at $32 per share, which would be an EV/EBITDA multiple of about 8.5, a good value given the company's current position.
Is Las Vegas Sands cheap? Sure, when you look at its long-term EV/EBITDA chart:
Wynn is the only casino competitor that even shows up on this chart for the entire three-year period.
But wait! What's that sharp downturn at the end? Travis already covered the recent drop in EBITDA, which is a major cause for concern given its rather straight-line trajectory before latest reports. There's no question that Sands has been the best-performing casino stock coming out of the recession, and even now, it's difficult to call it overpriced. But can it keep growing?
Betting on Sands (and to a similar extent, on many other gaming stocks) is a bet on Chinese conspicuous consumption continuing its impressive growth. That's also, as Sean notes below, a bet on continued macroeconomic strength in the Middle Kingdom -- a bet that I wouldn't be willing to take right now.
Expanding in China was a brilliant move, but Sheldon Adelson's plans for a new gaming strip in Spain, of all places, is a bit of a head-scratcher. There's virtually no chance that Europe will become the next great growth engine for casinos, as it has a population bomb hitting just as systemic unemployment threatens to destroy the long-term earning potential of its young. Of all the possible locations, Europe in general and Spain in particular seem particularly ill-advised.
Macau alone can be a powerhouse in good times, but these aren't good times. I'm kicking myself for missing this growth story in 2009, but I don't think it's a growth story today. Let's check back in when the big picture clears somewhat.
Some say buying and selling stocks is the ultimate form of gambling. I wonder what they'd say if we we're discussing buying and selling resort and casino companies?
Don't stew on that riddle too long, however, because we have a casino operator to tackle. I actually dissected Las Vegas Sands shortly after their earnings report and came up with three imperative factors that investors should watch that will dictate the overall health of the company.
First and foremost, Macau is Las Vegas Sands' precious. With the majority of revenue (and not just revenue, but high-margin revenue) coming from Macau, it's imperative that Las Vegas Sands continues to expand and one-up its peers. That was successfully accomplished in its most recent quarter, in which it expanded its market share in Macau to 17.7% from 16%. Although, as Travis pointed out, Macau's growth trajectory is slowing and is worth watching.
Secondly, we need to keep a close eye on how Las Vegas Sands approaches the push toward online gambling. MGM and Wynn are all for moving into a market that generated $32.8 billion last year, but Las Vegas Sands' CEO Sheldon Anderson will have none of it. We're still only in the first inning of the licensing process, but things are looking good that International Game Technology
Finally, macroeconomic conditions take precedence before anything. We've been witnessing China's growth slowing and retailers in the U.S. have signified a shift in consumer spending habits. Frankly, as long as unemployment levels in the U.S. remain above 8% and China's GDP growth keeps heading in the wrong direction, Las Vegas Sands is going to have a rough go of it.
While I do share some of Travis' bullishness regarding Macau, macroeconomic weakness and its shying away from online gambling would cause me to simply wait on the sidelines and review the company again in three to six months.
The final call
We all have our cautious hats on right now, so we won't be putting any chips on the table this week. We'll revisit Las Vegas Sands in a few months to see if conditions have changed enough for us to make a call one way or the other. In the meantime, you can check out our previous calls on our TMFYoungGuns CAPS page and see the picks we've made that have outperformed the market by 51.91 points so far.