Thursday, July 25, 2013

Buy This Bargain on the Pullback

Shares of Las Vegas Sands (NYSE: LVS) traded lower by as much as 3% early in Thursday's session as a result of a slightly earnings miss. While shares have moved to the upside by over 20% year to date, shares have moved well off the highs over the last few weeks. Just a couple months ago shares traded just above $60 before pulling back sharply as a result of China fears and statements regarding the future of online gambling from no other than the Chief Executive Officer, Sheldon Adelson.
If you have followed my recent articles regarding the company you would see I have been extremely bullish when it comes to the longer term prospects of this company. Even amidst executive step downs, China slowdowns, lawsuits, and a number of other struggles, the company has positioned itself as a global leader in the addictive gambling sector. In this article I would like to review what was a strong quarter, take a look at the long term prospects, and look at the competitive landscape within the sector.
The report
Las Vegas Sands reported its second quarter results following the market close on Wednesday. The company reported a 120% increase in its second quarter net income to $529.8 million or $0.64 per share, from $240.6 million or $0.29 per share on a year over year basis. On an adjusted basis, the company reported $0.65 in EPS compared to an analysts consensus estimate of $0.68 per shares. The miss of analyst estimates were due in large part to lower than anticipated table wins out of some of its properties.
Macau, the driver of growth and revenues for the last few years performed well with record setting table wins and impressive volume growth. Mass table win in Macau for the quarter was up an astonishing 61.1% to a record $930 million. Las Vegas Sands was able to grow twice as fast as the rest of the market in the most significant business segment. The company set record volumes, up 25.7%, in the quarter to a $42 billion. China's Slowing Down? Adjusted EBITDA across the Macao property portfolio expanded 53.2% to reach yet another record $657.2 million. While one may say gambling is addictive, and will outperform a broad Chinese slowdown, as with many inelastic services. Strength was seen in places other than gaming, within the Venetian Macao results, mall and retail revenues rose a whopping 17.9% and 25.2% respectively.
The future
The company announced it had begun construction on its 6th property in Macau. The Parisian Macao, in early construction, will offer consumers the integrated resort benefits long accustomed to the company's array of properties in Macau. The Parisian Macao will be seamlessly integrated with the company's other Cotai Strip properties including the Venetian Macao, the Four Seasons Macao, Plaza Casino and Sands Cotai Central to create a great experience for the masses. What caught my eye, the new resort will feature an Eiffel Tower alongside the countless shopping, dining, and entertainment options. While an Eiffel Tower may not be a driver of revenues by itself, a number of tailwinds are set to help the company.
While the rest of China may slowing down, 7.5% GDP growth, Macau a special district of China has remained hot. Officials have predicted earlier this month gambling revenue will grow 19% in July on a year over year basis, to $3.68 billion. Las Vegas Sands is set to capture a great deal of this revenue with its 21.5% market share, up from 20.5% last year. Rising incomes and levels of employment within Macau specifically bodes well for long term growth, but accessibility improvements will weight far more. A number of train improvements will open up the accessibility of Macau for the average Joe. In addition t he Hong Kong–Zhuhai–Macau Bridge, set to open in three years will give travelers easy access to the district in only 20 minutes from the Hong Kong airport.
The street has speculated for some time in regards to the rumors of special dividends and shareholder programs on the back of management's hints. Should the company look spin off its non-essential retail assets in Macau, some of the most valuable in the world, the company could afford to payout a nice dividend or pay down its debt further.
Competition
Wynn Resort (NASDAQ: WYNN) is an owner and operator of destination casino resorts, including Wynn Macau. Wynn is positioned to benefit from many of the same tailwinds mentioned above including increasing accessibility to Macau alongside wage growth. However, over the last few years the company's market share within Macau has slipped due to rising competition in large part from Las Vegas Sands. In 2008 market share stood at 15.9%, today market share has fallen drastically to 10.8% last year. A 5% drop is huge when you remember the masses of money coming through this tiny island. The company trades at a slight premium to Las Vegas Sands when its comes to forward earnings valuations, 19.51 times. However, the company does carry a slightly higher dividend yield above 3%.
I always like to include an exchange traded fund option for those investors whom may be looking to easily diversify in volatile sectors. In this case you would want to check out the Market Vectors Gaming Index ETF (NYSEMKT: BJK) . The Gaming Index offers investors broad exposure to the gaming sector and provides significant exposure to Macau specifically. The funds top holdings include Las Vegas Sands, Sands China, Wynn, and MGM, which all have strong assets in Macau.
Conclusion
I would use any weakness as a result of the most recent quarter to pick up some shares of Las Vegas Sands on the cheap. The company trades at only 19 times next year's earnings, it seems like a bargain considering the company is taking market share in an environment growing at over 20%. Long term growth in Macau seems likely as a result of rising incomes, high employment,a culture supportive of gaming, and increased accessibility.

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