Macau Not As Bad As It Seems for Las Vegas Sands Corp.

Marina Bay Sands in Singapore saved Las Vegas Sands in the fourth quarter. Image source: Las Vegas Sands. 

Every investor in gambling stocks knows that Macau has struggled over the past six months and that Las Vegas Sands (LVS -0.92%) would be one of the most heavily affected. When the company reported earnings earlier today, it was no surprise that Macau's revenue and earnings were down, because we simply knew it was coming.

What we didn't expect was an incredibly strong -- and lucky -- quarter in Singapore, where Marina Bay Sands finally flashed a little of its potential. When you add it all up, the figures were good, so let's dive into the numbers.

The Parisian in Macau will be opened late this year and could drive future growth in Macau. Image source: Las Vegas Sands.

What Las Vegas Sands is making its money
Overall, Las Vegas Sands' revenue fell 6.6% in the fourth quarter to $3.42 billion, but net income jumped 24.9% to $721.3 million, or $0.90 per share. The falling revenue and increasing earnings may sound strange, but when you dig into where Las Vegas Sands made its money, the story begins to unfold.  

The following table lays out Las Vegas Sands' quarter very well. Macau clearly struggled, with revenue falling 16.3%, compared with a 24.5% drop in the region's overall gambling revenue to $9.47 billion in the fourth quarter. That's the yardstick Macau's results need to be measured against for every gambling company there.  

Clearly, some of those gambling dollars made their way to Singapore, where revenue jumped 27% and EBITDA doubled. Marina Bay Sands in Singapore had an interesting fourth quarter in the past two years, because in 2013 it was especially unlucky and in 2014 it was unexpectedly lucky. When adjusted for normal hold percentages, EBTIDA was up 35.1% to $461.0 million -- still incredible growth.

Source: Las Vegas Sands earnings report.

The U.S. struggled slightly, highlighted by a 6% decline in revenue in Las Vegas. But with all the negativity in Macau, you can see that revenue and earnings are still holding up fairly well. This is a benefit of not only having a diverse operation, but also Las Vegas Sands' focus on the mass market in Macau. According to management, mass-market players generate about four times as much EBITDA per dollar gambled as VIP players, and that's helping keep EBITDA and net income as high as they are -- along with a little good luck in Singapore.

The question for Macau in 2015
Shares of Las Vegas Sands were up 3.3% after hours, and I wouldn't be surprised to see shares rise tomorrow based on these strong results. But long-term, the questions for the company surround gambling in Macau. Will VIP play continue to struggle in 2015? Are premium mass-market players going to continue shying away from the city (premium mass table win was down 18% year over year), or will they return as China's corruption crackdown becomes less of a shock?

For now, I think it's clear that financial conditions for Las Vegas Sands won't be as bad as some had expected. Even flat earnings would make this a solid investment, especially when you consider that the company's dividend was increased to $0.65 per quarter, a 4.6% yield at Wednesday's closing price.

I tend to think the Macau market will stabilize and slowly recover in 2015. It may be a painful process, and comparisons with a year ago will look bad for the time being, but investors buying now are getting in 37% below Las Vegas Sands' 52-week high and with a strong dividend yield. The upside is just too good to ignore today, and I think shares have a lot of room to run over the next few years.