Editor’s Note: This article was penned before the LVS earnings report, so some numbers have since changed. The points, however, remain valid.
After a horrible couple of years for the Macau gaming economy and the Chinese economy as a whole, shares of casino operator Las Vegas Sands Corp. (LVS) stock are now down more than 50% from their post-crisis highs in early 2014. Headed into 2016, the Macau government corruption crackdown and the possibility of a city-wide smoking ban are still weighing heavily on the world’s largest gaming market, and general weakness has been dragging down China’s economic growth numbers.
The Bear Case
Not only have 19 consecutive months of year-over-year gross gaming revenue declines cut Macau’s monthly revenue total in half from its 2014 highs, December’s 21.2% decline indicates that there is no solid evidence that the market has stabilized just yet. As government scrutiny has increased, Macau’s junket infrastructure has collapsed and the gaming economy has suffered an outflow of VIP gamblers, a segment of the casinos’ customer base that previously provided the majority of revenue.
In addition to falling revenues, LVS stock’s generous 7.0% dividend may actually be a bit too generous. Not only is it by far the highest dividend yield in the company’s history, LVS’s yield is currently well above the S&P 500 average yield of only 2.3% at a time when the company’s earnings have taken a big dip from their 2014 peak.
Surprisingly, CEO Sheldon Adelson indicated on the company’s last earnings call that LVS still intends to hike its quarterly dividend from $0.65 to $0.72 in 2016, a move that would put the company’s payout ratio near 120%, an uncomfortably high level. If the company instead decides that a dividend cut is best for business, the stock could be in for a huge swoon similar to the one that Macau rival Wynn Resorts, Limited (WYNN) suffered in April of last year after announcing its own dividend cut.
The Bull Case
Although the bears can certainly make a compelling case, LVS stock bulls have plenty of valid arguments as well. First, despite the stock’s poor performance and LVS’s nearly $9 billion in debt, the company appears to be in a relatively stable financial situation. With nearly $2.0 billion in cash on its books and the completion of its new $2.5 billion Parisian resort on the Cotai Strip expected sometime this year, the company’s debt doesn’t appear to be an imminent problem. In fact, LVS’s debt-to-equity ratio of 1.32, while on the high end of its recent range, is well short of the perilous situation the company endured during the Financial Crisis.
From a valuation perspective, the stock’s forward P/E of only 15.5 is near its lowest point of the past five years, suggesting that the market has already priced in further downside to the company’s 2016 earnings.
Perhaps most importantly, market fears about China’s economy seem a bit extreme. Just this week, China’s Vice President Li Yuanchao pledged that the country will take a number of stimulus measures in 2016 to stop the economic slowdown and ensure that “the economy will grow more steadily and have more diversified driving forces.” Despite registering its slowest GDP growth in 25 years in 2015, while the rest of the world is worrying about recession, China still grew its economy by an enviable 6.9% last year.
Stifel analyst George Askew also released a note this week projecting that China’s economic growth will stabilize “around current levels” in 2016.
Until China and Macau show definitive signs of stabilization, the fact that LVS generates 90% of its revenue in Asia will continue to make the stock a risky bet. However, for long-term investors that have the stomach for some short-term volatility, the LVS stock certainly seems to offer a good value opportunity at its current price.
As of this writing, Wayne Duggan was long WYNN.