Las Vegas Sands Worth A Gamble

By Ryan C. Fuhrmann | July 15, 2012 AAA

Casino operator Las Vegas Sands (NYSE:LVS) reported second quarter results on Wednesday after the market close that disappointed investors. The stock quickly fell to its lows over the past year. As a result, it could represent a solid buying opportunity.

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Trends in Macao
Las Vegas Sands reported decent growth in Macao, the designated special administrative region in China that allows gambling and now qualifies as the largest gambling market in the world. In 2011, Macao rolling volumes jumped 36.3% to a record $33.4 billion. And while growth in the region has slowed from its peak, management did boast that it grew faster than the overall market, "generated significantly stronger gaming volumes" and its share of the market grew to 17.7%. The company competes with the major industry players of Wynn Resorts (Nasdaq:WYNN), MGM Resorts (NYSE:MGM) and Melco Crown Entertainment (Nasdaq:MPEL) in Macao.

The firm owns just over 70% of Sands China Ltd., which owns the Venetian, Four Seasons Hotel Macao and Plaza Casino properties. It also just opened the first phase of the Sands Cotai Central on April 11 and means most of the quarter included the results of this new property. Total quarterly sales jumped 22.3% to $1.5 billion. Reported net income fell 40% to $160.5 million and included a number of non-cash charges. The company's adjusted measure of profitability increased nearly 11% to $422.9 million.

SEE: Earnings Quality: Measuring Accruals

Company-wide Trends
The company also has significant casino operations in Singapore and in Las Vegas. It holds a dominant share in Singapore with an estimated 50% of the market and has two large resorts on the Las Vegas Strip. Primary rivals in Vegas include Wynn, MGM, Caesars (Nasdaq:CZR) and local players such as Boyd Gaming (NYSE:BYD). Both regions saw solid top line and profit trends. Total overall sales advanced 10.1% to $2.6 billion and adjusted net income fell from 54 cents to 44 cents for the quarter. The stock fell more than 7% after the earnings release as the profit levels missed analyst expectations.

Looking Forward
For the full year, analysts currently project sales growth above 24% and total sales of nearly $12 billion. The current profit projection is $2.66 per share. The stock fell to below $35 per share following the earnings miss and now trades at a more reasonable forward P/E of 13.1. The earnings multiple based off 2013 expectations of $3.66 looks even more appealing at below 12.

SEE: Earnings Forecasts: A Primer

Property Development
The investment appeal of Las Vegas Sands lies in its ability to grow its existing gambling enterprise and open new casinos. It still has other phases to open at the Sands Cotai Central resort and plans to have 5,800 total hotel rooms when phase II is completed. It also has an additional three parcels to open in Macao, though it will be an additional three years until another property is opened in the rapidly growing gaming market. There are also plans for the opening of a set of condominiums in between its two Las Vegas properties.

The company also has its sights set on Japan, South Korea and Vietnam in Asia for casino development. It also lists Europe and Canada as candidates for additional resorts, though there is greater appeal in Asia, especially if it can continue the exclusivity it has been able to build up so far in Macao and Singapore as part of a select handful of approved developers.

SEE: The Risks Of Investing In Emerging Markets

The Bottom Line
Las Vegas Sands is confident about the ability to deliver on its development pipeline. It is also starting to generate consistent and visible cash flow and therefore felt confident enough to initiate a quarterly dividend, which it first announced back in February. The quarterly dividend is currently 25 cents and works out to an annual yield of 2.5%. Combined with solid overall profitability and a reasonable earnings valuation, there are a number of positives to this investment story. Any major development deal could send the stock significantly higher, though there is also the potential that it is caught expanding in a down economy, which occurred during the credit crisis.

At the time of writing, Ryan C. Fuhrmann did not own shares of any company mentioned in this article.

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