What the Bears Miss About Las Vegas Sands

by Gene Marcial | March 23, 2012 10:29 am

The bears and many traders love to play the China Card as a means predicting gloom — if not doom — about the market. In particular, they love to warn investors away from “China stocks,” especially U.S. companies that operate businesses in that fast-growing nation.

Gaming companies get the worst knocks. That includes Las Vegas Sands (NYSE:LVS[1]), which owns casinos not only in Las Vegas but in Macau, China. The latest warning from the bears: China’s rapid economic growth is losing steam.

Traders love to use China more as a way to move in and out of stocks, and in the case of LVS, it’s an easy vehicle because of its liquidity and popularity among investors in the gaming industry. Even more so because the stock is vigorously in an uptrend in spite of many challenges it faces as a U.S. company in China.

In fact, the stock hit a new 52-week high of $59.12 a share on Mar. 19, 2012 before slipping to $57.58 on Mar. 22, 2012. LVS is an easy target for the shorts because in the past 12 months it has more than doubled, climbing a total of 51%. That kind of performance has to attract the bears.

The bulls, however, are even more bullish about the stock. And a number of analysts have boosted their price targets.

“We continue to believe that shares of LVS are among the most attractive in our coverage universe as it has the tailwind of a still ramping Singapore property, the opening of new properties on the Cotai Strip of Macau (Sands Cotai Central) in phases this year, and stronger than expected results from Macau driving increases in revenues and EBITDA,” says Dennis I. Forst, a gaming analyst at KeyBanc Capital Markets. He has raised his price target to $65 a share from $57.

The company has the cash flow to pay for growth projects in Macau, opportunities in the Far East, Europe, and the U.S., pay its newly initiated dividend and pay down debt over time,  notes the analyst. “We expect Macau and Singapore to surprise investors to the upside this year,” says Forst.

Macau is up 28% year-to-date at LVS, he adds. In the U.S., the improving economy and consumer spending will help results in Las Vegas and Pennsylvania, where LVS operates the Sands Casino Resorts in Bethlehem, which opened in May 2009. So further increases in earnings and EBITDA are possible, Forst adds. In Las Vegas, LVS owns and operates the Venetian Casino Resort, Sands Expo & Convention Center, and the Palazzo Resort Hotel.

The stock remains inexpensive, he argues, because investors under-appreciate growth opportunities in Macau and Singapore. The stock is trading at a premium compared to its peers operating in Macau, but Forst believes it deserves the higher price based on his discounted-cash-flow model and sum-of-its-parts valuation. He forecasts LVS earning $2.76 a share in 2012, up from 2011’s $2.06, and 98 cents in 2010. Forst’s earnings estimate is higher than the consensus Wall Street forecast of $2.58 a share.

Esther Kwon, an analyst at S&P Capital IQ, who has a buy recommendation on LVS, expects revenues in Macau, which rose about 42% in 2011, “to remain strong through 2012.” She also thinks EBITDA (earnings before interest, taxes, depreciation and amortization) should accelerate as hotel facilities and other amenities ramp up at the Marina Bay Sands in Singapore, a market she sees having limited competition and very attractive EBITDA margins. In sum, LVS’s “fundamental business remains very strong,” says Kwon.

For 2012, Kwon sees revenues rising more than 20%, to $11.5 billion, from $9.4 billion in 2011, boosted by the opening of the Sands Cotai Central in Macau in the first quarter, continuing strong performance at existing properties in Macau and Singapore and improvement in Las Vegas. She forecasts LVS rising to $2.45 a share in 2012 and to $2.92 in 2013.

One reason for the success of LVS’s operations in Macau is that it’s the only location in China where casino gambling is permitted. And if you realize that China is the most populous nation on the planet, you can see how many Chinese gamblers will flock to the only game in town.

  1. LVS: http://studio-5.financialcontent.com/investplace/quote?Symbol=LVS

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