Las Vegas Sands (NYSE:LVS), the casino developer and operator, is expected to report first-quarter earnings soon. So far in April, the LVS stock price has increased by about 13%. Yet despite the recent move up, year-to-date the shares are still down 30%, hovering around $48.
Now long-term investors are wondering if they should buy into the company around these levels.
If you do not currently own LVS stock you may want to wait until you have analyzed the upcoming Q1 metrics to have a better appreciation of the full effects of the Covid-19 pandemic on the business. The stock price is likely to be volatile in the coming days.
LVS Stock and the Pandemic
Las Vegas Sands owns and operates several resorts in the U.S. and Asia. They include The Venetian Resort and Sands Expo in Las Vegas, and the Marina Bay Sands in Singapore.
Through majority ownership in Sands China Ltd., Las Vegas Sands also operates several properties on the Cotai Strip in Macao as well as on the Macao Peninsula.
When the novel coronavirus outbreak first affected China earlier in May, management closed the Macao resorts for 15 days as required by local authorities there.
Macau is currently the only jurisdiction where it is legal to gamble in China. During the closure in February “gross gambling revenues fell nearly 90%.” The exposure of Las Vegas Sands to Macau stands around 70% of total revenue.
As the pandemic started affecting our shores, on March 17, Las Vegas Sands also closed its U.S. properties. In a press release, the company said “While we hope this closure is a short-term necessity, we are realistic it may be a prolonged event. Like we have done in the past, we are fully prepared to support our team members over an extended period should it be needed.” At this point we do not know when they may reopen.
The current indication is that the virus has already peaked in China. However, at this point health-related concerns are still quite high in the U.S. In the coming days, President Donald Trump is likely to be consulting with various federal and state agencies. Then we will know the potential opening date of our economy.
However, casinos are crowded venues. In case of a gradual opening of the economy or a second wave of the outbreak, LVS stock’s recovery may take longer than initially anticipated.
Will Las Vegas Sands Ask for Government Help?
On March 27, President Trump signed the legislation, called the CARES Act, that will provide over $2 trillion in stimulus to the U.S. economy.
Earlier in March, the gaming industry had joined airlines and various other groups in asking for government financial help. According to the the American Gaming Association (AGA), as of the end of March, all of the 989 commercial and tribal casinos nationwide had closed their doors.
Now we have the details of the bill. Businesses that receive federal aid will not be able to pay dividends or buy back their own shares.
Las Vegas Sands has indicated that it will not apply for government assistance.
It may still be too soon to say how most casino operators will deal with the given uncertainty in the coming months. If a global recession is already here, then the worst may not necessarily yet be behind for LVS stock.
If these businesses decide to apply for government help after all, then they’d also need to stop their dividend payments as well as share buybacks.
LVS stock’s current dividend yield is about 6.6%, a highly attractive amount to collect under normal circumstances. But in case it needs to conserve cash, management may have to decrease or fully cancel the dividend during the year.
Then the beaten-down LVS shares may not be able to deliver robust returns in 2020.
What To Expect From Q1 Earnings
Las Vegas Sands is expected to release Q1 earnings soon.
When it reported Q4 and year-end 2019 results in late January, it topped revenue and earnings estimates. It posted revenues of $3.51 billion for the quarter ended Dec. 2019. A year ago, quarterly revenues had been $3.48 billion.
Q4 earnings came at 88 cents. Last year, the number was 77 cents per share. Another strong point was that the casino group had $4.23 billion of cash on the balance sheet. Overall, the results showed that Las Vegas Sands had a robust 2019.
The expected Q1 numbers, on the other hand, will no doubt show that the casino operator’s business is being negatively affected by these difficult times. However, it’s not yet quite possible to know the extent of the damage to company earnings.
In other words, investors’ reaction after the quarterly call will be based both on the Q1 numbers and management’s commentary on the effects of the pandemic.
Therefore, if you’re not yet a shareholder, you may want to wait before committing any capital into LVS stock. You may be interested to know that Deutsche Bank has recently lowered its price target for the stock from $75 to $50.
If you already own LVS stock, then you may want to ride the wave. Alternatively, depending on your experience with options, you may initiate a covered call position.
For example, a May 15-expiry at-the-money covered call would help decrease the volatility of your position. It would also enable you to participate in an up move while providing some downside protection.
It may be several quarters before management builds the business back up. In the meantime, unfortunately for current investors, the share price could come under further pressure.
The Bottom Line on Las Vegas Sands
Things for the average citizen and the economy will likely improve later in the year. However, I still find it too risky and early to own shares of casino operators in a long-term portfolio.
Finding the right balance between health and economics can prove tricky for decision makers. And we do not yet know what type of an economic recovery will come both in Macau and Las Vegas. If the lockdown in the U.S. or travel restrictions globally drag beyond mid-spring, then LVS stock’s earnings will be further affected. After all, management relies on domestic and foreign tourists visiting the casinos. In such a case, the stock’s attractive dividend yield may come under pressure, too.
In short, investors may find that there might be other stocks to play a potential rebound in our economy. But if you have some spare risk capital, then you may consider taking a gamble on the shares.
Tezcan Gecgil has worked in investment management for over two decades in the U.S. and U.K. In addition to formal higher education in the field, she has also completed all 3 levels of the Chartered Market Technician (CMT) examination. Her passion is for options trading based on technical analysis of fundamentally strong companies. She especially enjoys setting up weekly covered calls for income generation. As of this writing, she did not hold a position in any of the aforementioned securities.