By Siraj Sarwar
Las Vegas Sands (NYSE:LVS) is the globe's largest operator of casinos, entertainment, hotel, retail, food and beverage, and convention center operations. The company owns the Sands Macau, Venetian Macau, and Four Seasons Hotel Macau in China. In addition, Las Vegas Sands owns the Venetian Las Vegas, and the Marina Bay Sands resort in Singapore and Sands Bethlehem casinos in the U.S. The corporation generates about 85 percent of its revenue from Asia. The corporation's casino operations generate about 75 percent of revenue.
The stock has been following an upside trend, recently. Since its dip of $33 in August, it returned about 50%. However, I still there is some upside potential left in the stock. In this article, I dig deep into recent financials and the balance sheet to prove my point.
The corporation saw record financial results in Macao, which increased its overall results for the Q3. LVS' market share of gross gaming revenue in Macao reached 19.3 percent in the Q3 of 2012, in contrast to 14.3 percent reported in the Q3 of 2011. Adjusted property EBITDA in Macao rose 25.7 percent in the Q3 of 2012 to a record $487.9 million. The raise was pushed by record gaming values in Macao.
Net revenue for the Q3 was $2.71 billion, which signifies an increase of 12.5 percent over the Q3 of 2011. The corporation's consolidated adjusted property EBITDA in the Q3 of 2012 was $876.9 million, lower 5.1 percent over the Q3 of 2011.
Las Vegas Sands declared a special cash dividend of $2.75 per share, with a record date of December 20, payable on December 28th. Through the special dividend, Sands will be distributing about $2.26 billion to its stockholders by the end of this year. Because of the significant betterment in the free cash flows since 2010, LVS elevated its quarterly dividend by 40 percent from $0.25 to $0.35. The corporation will pay a quarterly dividend of $0.25 per share for the Q4 of 2012. The dividend increase will be applicable from the Q1 of fiscal 2013. Sands dividend payment signifies half of the free cash flow produced, indicating sufficient capacity to maintain a high dividend growth.
With the news, Sands joined a rising list of companies that have declared a special end-of-year dividend payment. In addition, Sands increased the quarterly dividend payout in an effort to protect shareholders from possibly paying higher taxes on dividend income. If congress in Washington D.C. fail to accomplish an agreement on the fiscal cliff problem, tax increases and automatic spending cuts will be effective on January 1, 2013.
The anxiety due to the fiscal cliff has compelled a number of companies to examine their dividend payout plans. Based on Bloomberg, from the end of September to mid-November, 59 companies announced a one-time cash payment to shareholders. One-time cash payment is up from about 15 in the same period previous year. The highest tax rate on dividend income since 2003 has been 15 percent. However, this tax rate could climb significantly if an agreement on the fiscal cliff issue is not achieved before the year-end deadline.
Special Dividend Reflects Strong Balance Sheet
Returning capital to shareholders remains a long-term priority for the company. What this special dividend really represents is the unique position of the company in the hospitality, leisure and gaming industry. The gigantic cash flows from current operations and the strength of the balance sheet have put the company in the enviable position. Las Vegas Sands is returning capital to shareholders, while at the same time staying true to roots as a growth company. In addition, the company is very aggressive in identifying and targeting new development opportunities. The company's criteria for investment return will help it to grow its cash flows even higher in the years to come.
Las Vegas Sands
Melco Crown Entertainment
LVS has exhibited a solid margin performance as most of the company's capital return metrics and margins are above the par. Due to the higher profitability and the lower leverage, the company was able to maintain safe interest coverage. The company's quick and current ratios are considerably above the peer averages, displaying a healthy balance sheet.
Las Vegas Sands has an ideal record in the casino industry that generates higher returns on invested capital and higher margins. The company is positioned to benefit from robust growth in the fundamentally appealing Asian gaming markets. The corporation is focused on mass market customers in Asia, a market that has lower volatility, higher margins, and better growth prospects. I view Sands as significantly undervalued. I expect the company to increase earnings per share at double-digit annual rates for the following five years. Analysts also agree with me as they expect earnings to increase by 20% annually in the same period.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Business relationship disclaimer: EfsInvestment is a team of analysts. This article was written by Siraj Sarwar, one of our equity researchers. We did not receive compensation for this article (other than from Seeking Alpha), and we have no business relationship with any company whose stock is mentioned in this article.