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Tickers in this Article: LVS, WYNN
After reporting a 65% drop in net profit Tuesday, Las Vegas Sands (NYSE:LVS) was rewarded with a nearly 10% jump in its stock price.

What might seem like a baffling turn of events is clear proof that investors understand you have to spend money to make money. A large part of the drop can be attributed to startup costs for a new resorts in Macau, China, and Las Vegas. Now the largest casino in the world is ready to start making money off its huge investment. After a big drop earlier in the year, is the stock ready to start the climb back?

Eye on the Prize
Investors were focused on the results from a small island off the coast of China, as well as a new Vegas property that is targeting the always sought-after high roller. Rising expectations for gaming revenues throughout several company resorts in Asia should serve the company well, and a recent sell-off in the stock could make for an attractive entry point. Investors should also note the historical safety found in casino stocks during market downturns - consider that during the bear market of 2000 and 2001, the S&P 500 Casino & Gaming Index actually rose over 90% while the broad S&P 500 fell by over 40%. It seems that when times are tough, people need their vices a little bit more.

Inside the Numbers
The reported fourth quarter earnings figures were nothing to write home about, with Las Vegas Sands earning just over $39.9 million in net income, down from $113.6 million the year before. Startup costs for the new resorts caused a big spike in operating costs, but these were largely expected.

The company did miss estimates however, on both the earnings and revenue front - even though revenue climbed nearly 65% in the quarter. The size of the revenue spike shows just how large the expansion underway truly is. The recently opened Macau Venetian, located on a small island province of China (the only place where gambling is currently legal in the country), is now the single largest casino in the world.

Expectations High For Asian, Vegas Properties
The Macau Venetian property brought in EBITDA of $117 million during the fourth quarter, and should quickly prove to be a cash cow for the company. Growth rates remain very strong in Macau (47% during 2007), which recently overtook Vegas as the largest casino destination in the world by revenue. (A big chip stack is important at the poker table and on Wall Street; to learn more, read Spotting Cash Cows.)

The story of Vegas will inevitably rise and fall with the U.S. economy, but the Asian properties are meeting ravenous demand from Chinese mainlanders and tourists. Not one to neglect the company's home base however, LVS just last month opened a new 3,000 room resort, dubbed the "Palazzo", next to the flagship Venetian Resort which will compete with Wynn Resorts (Nasdaq:WYNN) namesake resort for the title of top high-roller destination. The company is also constructing a $3.8 billion property in Singapore, due to open in 2009, and an $800 million casino in Pennsylvania.

Growth Always Comes at a Price
All told, we're seeing a massive expansion, one that will undoubtedly push revenues far higher than the levels we're seeing today. The question remains whether the cash flow will be strong enough to service the high debt load (which peaked at over $7 billion during the second quarter). Eventually it will have to start whittling the debt down to safer levels. But if there's one thing casino resorts can count on, it's cash flow. As the performance history of the S&P index suggests, people might not stop their trips to the one-armed bandits even though it may be the wisest choice. (To learn how to analyze a company's debt load, see Debt Reckoning.)

Sin Stocks the Place to Be?
I wasn't crazy about the casino stocks during most of 2007. Valuations had gotten out of hand during the private equity (PE) craze, as everyone thought the next big casino buyout was just around the corner. Again, this is based on the strong cash flows, something vital to a highly-leveraged private buyer, but the whole sector sold off quite rapidly once the first PE deals got stalled, and Las Vegas Sands dropped over 30% despite the positive long-term story. So, this once pricey stock now sports a very reasonable 30-times forward earnings multiple (although earnings estimates do vary quite a bit).

In addition to the stress/vice lift that could occur with these stocks, Las Vegas Sands has the added insurance of high international exposure and millions of square feet of convention facilities, which tend to stay busy year-round. I also like the shift toward higher-income customers, especially while the middle-income and low-income consumers struggle with product inflation and a nasty housing market. And if the dollar continues to stay low against most currencies, look for an increased number of foreign gamblers traveling to the U.S. to spend their improved coin at the Vegas resorts.

For more on the so-called sin stocks, see A Prelude To Sinful Investing.

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