Las Vegas Sands (NYSE:LVS) is facing considerable challenges due to demand weakness in Macau, a key market for the company. However, the business offers a lot of room for improvement in the middle term, and Las Vegas Sands stock looks like a bargain in comparison with other big casino operators such as MGM Resorts (NYSE:MGM) and Wynn Resorts (NASDAQ:WYNN). Is now the right time to bet on Las Vegas Sands?
Things have been better Macau
Las Vegas Sands is a leading resort and casino operator in Macau, the only region in China where gambling is legal. The company makes nearly 50% of its profits from this crucial Market, and Macau has been a powerful growth driver for Las Vegas Sands over the past several years.
The Chinese government is imposing a series of regulations and visa restrictions on Macau gamblers to fight corruption and illegal money laundering via casinos in the region. In addition, the economy in China has been quite volatile over the past several quarters. In this context, gambling demand in Macau is under heavy pressure, and monthly gross revenue from games of fortune fell 28.4% in October.
That's quite a steep decline, but October still was the first month since January in which gambling revenue in Macau fell less than 30% year over year. Also, revenue increased by nearly 10% versus September levels. It's far too early to call a recovery in Macau, but maybe the worst is already in the past. After all, it makes sense to expect better demand once the regulatory environment normalizes, and year-over-year comparisons should be easier in the coming months.
Las Vegas Sands is clearly feeling the impact from Macau headwinds. While the company is doing much better in Las Vegas and in Singapore, weakness in Macau dragged total revenue down by 18% year over year during the third quarter. The business is still remarkably profitable, though. Even under challenging conditions, Las Vegas Sands made a hold-normalized adjusted EBITDA profit margin above 37% of revenue last quarter.
Both sales and earnings will most probably remain under pressure until demand in Macau turns around. However, investors shouldn't miss the forest for the trees. Macau offers enormous room for growth on the back of avid leisure demand from a rising Chinese middle class for years and even decades to come.
According to management, Las Vegas Sands will own 12,677 hotel rooms in Macau by 2017. That number will represent approximately 45% of the market in four- and five-star hotel-room inventory among gambling operations in the region. Holding that much of the market also puts the company in a privileged position to profit from economic development in China over the long term.
Las Vegas Sands looks undervalued
When comparing valuation ratios for Las Vegas Sands versus other big casino operators such as MGM Resorts and Wynn Resorts, Las Vegas Sands stock looks remarkably cheap.
|Company||P/E||Forward P/E||Dividend Yield|
|Las Vegas Sands||17||19||5.6%|
MGM isn't so big in China, so the company isn't too affected by the problems in Macau. MGM suffered a 33% decline in China revenue during the third quarter, totaling $529 million. However, total revenue declined by a much more moderate 8% year over year, coming in at $2.28 billion during the third quarter.
Wynn Resorts is taking a bigger hit than MGM, as the company makes approximately 60% of revenue from Macau. Wynn Resorts reported a big 27% drop in sales during the third quarter, as revenue in Macau fell 37.9% while sales in Las Vegas declined 3.9%.
Comparisons between Las Vegas Sands, MGM, and Wynn Resorts aren't completely straightforward, since the three companies have their own weaknesses and strengths, as well as different degrees of exposure to Macau. However, the fact remains that Las Vegas Sands looks quite cheap in comparison with its peers, not only in terms of price to earnings, but also when considering the company's big 5.6% dividend yield.
Management has increased dividends by more than 30% annually over the past several years, from $1 per share in 2012 to $2.88 for 2016. In addition, the company has returned nearly $2.3 billion to shareholders via stock buybacks since the inception of its share-repurchase program in June 2013.
It's hard to tell how the situation in Macau will evolve in the coming months, but Las Vegas Sands is attractively valued from a long-term perspective, and investors are being rewarded for their patience with substantial cash distributions through both dividends and buybacks. For those who can handle the uncertainty in the middle term, Las Vegas Sands stock offers material upside potential from current levels.
Andrés Cardenal has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.