Las Vegas Sands (NYSE:LVS) stock is down by nearly 37% during the last year, mostly due to weak gaming activity in Macau, the only region in China where gaming is legal and a major market for the industry.
While it's hard to tell how long it may take for conditions in Macau to improve, everything seems to be indicating that Las Vegas Sands' problems are temporary by nature. Let's dig into what's causing the current revenue decline and why Las Vegas Sands stock could easily turn out to be a buying opportunity for investors today.
All bets are off
In addition to a slump in general tourism among Chinese travelers, the Chinese government is imposing a series of controls and regulations to fight corruption and illegal money laundering in Macau's casinos, including credit and visa restrictions to VIP gamers. Combined, these factors have contributed to an overall decline in Macau's gaming industry.
Based on data from the Macau Gaming Inspection and Coordination Bureau, gross gaming revenue in the region fell 17.4% in January, and the decline even accelerated in February, as gaming revenues tumbled 48.6% versus the same month in the prior year. This puts the total accumulated decline during the first two months of 2015 at a dismal 35.1%.
Adding insult to injury, several research firms and Wall Street brokers have issued negative comments on Macau casinos recently because there is little visibility regarding the possibility of a turnaround in the mid term. Combined, these problems have led to much pessimism surrounding Macau casino stocks, especially regarding Las Vegas Sands.
A smart player is being dealt a lousy hand
But despite the tumultuous problems in Macau, things don't look that terrible for Las Vegas Sands in the long term, especially considering the company's fundamentals. Gaming is a remarkably lucrative business, and Las Vegas Sands has been the leader Macau's mass market.
Las Vegas Sands is in a position of strength to benefit from the rising Chinese middle class and increasing discretionary spending in China. Management believes that nearly 200 million Chinese people will be traveling outside of China by 2020, which more than doubles the 97 million international Chinese travelers registered in 2013. In addition, Macau is expected to continue attracting travelers from all over the world, especially from other Asian countries where gambling is illegal.
Digging deeper, Las Vegas Sands has consistently delivered strong sales and profit growth over the years, even while facing challenging conditions in 2014. The company produced an adjusted EBITDA margin above 37% last year, which suggests the rock-solid cash flows will allow the company to successfully sail through the storm.
Growth plans are also quite exciting. The Parisian Macau is scheduled for inauguration in late 2015 and will provide 3,000 additional rooms to the company's presence in Macau. Las Vegas Sands plans to have more than 12,600 rooms across its portfolio in Macau by 2017, representing a leading market share of 44% among gaming operators in the region.
Looking beyond Macau, management is exploring potential for growth in countries such as Japan, Korea, and Vietnam. If Las Vegas Sands can achieve in these markets only a fraction of what it has done in Macau, the company would be poised for massive growth over time.
According to S&P Capital IQ, Las Vegas Sands trades at an adjusted P/E ratio around 15 times earnings forecasts for the coming year, a discount versus the average valuation for companies in the S&P 500 Index, which is in the neighborhood of 18. The stock looks particularly attractive in terms of dividends, too, with its juicy dividend yield of more than 5% on a forward basis.
Importantly, Las Vegas Sands has delivered consistent dividend growth during the last several years and planned a 30% dividend hike for 2015. In addition, the company has used share buyback programs to deliver shareholder value. In fact, during the three-year period ended on December 31, 2014, Las Vegas Sands had returned more than $9.6 billion to shareholders when including both dividends and buybacks. Recently, the company has announced a new $2 billion share-buyback program signaling promising growth ahead.
Overall, Las Vegas Sands is being hurt by external conditions, but the company has demonstrated that it's a highly profitable growth business. Sure, it may take a while for things to improve in Macau, patient investors should consider that Las Vegas Sands is trading at an opportunistic valuation offering substantial upside potential from current levels.