Since the depth of the financial crisis, Las Vegas Sands (NYSE:LVS) has been the top-performing stock in gaming and has become a $60 billion behemoth in the industry. Macau has clearly been the major driver, with Las Vegas Sands owning four major resorts in the world's largest gaming market, and Singapore's Marina Bay Sands is the company's second most profitable resort, expanding exposure to Asia.
However, with the equity and net debt value (enterprise value) of Las Vegas Sands now 13.4 times the EBITDA (a proxy we use for cash flow) it has created over the past 12 months, the stock is a higher risk than it once was. Let's take a look at whether this is still a great stock for investors.
Well positioned in Macau
When comparing casino operators in Macau, one of the first things to look at is the location of their resorts. The old gaming region on the Macau Peninsula is becoming more and more like Downtown Las Vegas, with smaller and older casinos than the megaresorts of Cotai. Cotai is an area of reclaimed land between Taipa and Coloane islands in Macau, creating a blank slate where Las Vegas Sands made a huge bet on the future of gaming.
The company built The Venetian Macau before anyone else ventured onto Cotai, and it now has three megaresorts on the area of reclaimed land, with others following its lead. Melco Crown's City of Dreams was the second major resort on Cotai and has been the major driver of Melco's value over the past few years. But MGM Resorts, Wynn Resorts, and SJM are currently relegated to the Macau Peninsula and are feverishly building on Cotai just to access this massive market.
The draw of Cotai is that it has a lot of space and it's becoming the huge draw for the mass market, where there's more growth and margins are higher than in the VIP market. Given the billions of potential customers in China and surrounding countries, the mass market is an incredible opportunity for Las Vegas Sands to grow organically, even if it weren't building The Parisian next to its other resorts on Cotai.
Upside in Asia
Macau is Las Vegas Sands' biggest market, and its resort in Singapore generated $1.4 billion in EBITDA, but this may just be the start in Asia. Japan is mulling a bill that would allow megaresorts to be built in limited numbers there, which may create a similar opportunity as Singapore.
South Korea is another country Chief Executive Officer Sheldon Adelson has his eyes on. It approved the first foreign-owned casino resort earlier this year in an effort to capitalize on growing Chinese tourism.
There are only a handful of companies with the gaming experience and balance sheet to compete in these new locations, and Las Vegas Sands is one of them.
Little risk in the balance sheet
The major change over the last five years is the risk Las Vegas Sands' balance sheet presents to investors. In 2008, Sheldon Adelson had to step in to save the company, raising $2.1 billion of capital, much of it from Adelson himself.
Today, that position has changed dramatically and Las Vegas Sands has $7 billion of net debt and generated $5.1 billion of EBITDA in the past 12 months. The reduction in leverage along with a new 2.7% dividend yield make this a much lower-risk investment than casino stocks have been since the '80s, and make this an attractive stock for even risk-averse investors.
Is Las Vegas Sands a buy?
Given the value on the balance sheet and growth opportunities in Macau and elsewhere in Asia, I think there's still decent value for long-term investors even with a 13.4 enterprise value/EBITDA multiple. But keep in mind that gaming stocks can be very volatile, and if Macau's growth slows in coming months, the stock could slide as it has done in recent months.
Long-term, the investment thesis is very strong, so buying a small position now and adding on any dips is the best strategy. The gaming market as a whole should do very well as more Asian consumers look for entertainment, and Las Vegas Sands is leading the pack with the scale to take advantage of new markets that may arise. The growth story is far from over for Las Vegas Sands.