Las Vegas Sands Is Worth The Gamble

Casino stocks may be near a cyclical low and are worth buying.
I’ve always been interested and attracted to gaming stocks.  The reason is that a large part of their revenue is tied to gambling, in which the consumer is ALWAYS at a disadvantage.  Gambling is designed so that you lose all your money and that the house walks away with your shirt.
There are few businesses any investor could love more, outside of monopolies.  The downside to gaming stocks is that they come along with a business that can sometimes be a drag on earnings, in that they are also part-hospitality business.
Fortunately, the hospitality sector is also booming.  You lose in hospitality if you are over-leveraged or if you don’t know how to execute.  The reason I’ve always liked Las Vegas Sands (LVS) is that they execute in hospitality, they execute in gaming, and they are basically part of a cartel that owns most of Las Vegas.  And of course, it’s owned by one of America’s greatest businessmen, Sheldon Adelson.
There’s also these weird cycles in gaming.  Things can bounce back and forth from one month to the next.  So even within a bull cycle, or an up cycle in hospitality, gaming can lurch from one end of the spectrum to another.
That’s because gaming isn’t all about Las Vegas anymore.  It’s also heavily dependent on Macau, where gaming revenue is down over 20% YOY.  China is rattling its saber in regards to Macau corruption and rooting it out.  We’ve got democracy protests in Hong Kong which puts a damper on travel to Macau.  And now there’s a smoking ban in Macau casinos.
But to me, these cycles are part of what you deal with in gaming.  The trick is buying when a stock is returning to its lows, and LVS is close to it.
Q3 results from this week were mixed.   Net revenue fell 1%. Adjusted property EBITDA as $1.28 billion, which was up 0.4%. Operating income increased 6.2%, but that came mostly from a legal settlement.  EPS increased 9.2%.  But China saw a 0.4% decrease in revenue.
Both gaming and hotel metrics are solid in Macau, though.  Hotel occupancy in particular looks good, up 150bps to 93.3%, an dADR up from $242 to $269.  RevPAR roared up from $222 to $251.  These same metrics were reflected in the results at the Sands Cotoi, where occupancy was up from 84.8% to 89.5%, ADR up from $152 to $176, and RevPAR up from $129 to $157.
Despite the headwinds, LVS is worth considering.  Earnings are still expected to hit $3.57 this year, up 23% over last year, and 15% over the next five years.  LVS has plenty of cash with $3.15 billion, and $9.94 billion in debt.  The company tends to generate about a billion in free cash flow every quarter, so even in these tough times, it does very well.
The stock thus trades at 18x estimates, which suggests to me that it is fairly valued.  It is also some 30% off its 52-week high of $88.28 and just off its 52-week low.  If you want to grab a stock that may be on the low end of a down cycle, now may be the time.
Lawrence Meyers does not own shares of LVS.

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