By Matt Doiron
Las Vegas Sands Corp. (LVS) is up 15% year to date after the company reported that, while earnings in the fourth quarter of 2012 were essentially unchanged from the same period in the previous year, revenue had risen about 21%. Top-line growth took place across the company's business units including casinos, rooms, and food and beverage. In terms of geography, results in Asia were particularly strong and as that is expected to be a major source of growth going forward, it is hardly surprising that the market has been as pleased as it has.
The valuation is dependent on growth from Asia and other sources, as the current trailing price-to-earnings multiple is 29. Wall Street analyst consensus is for $2.68 in earnings per share this year and then $3.08 in 2014. Those figures imply current-year and forward P/Es of 20 and 18 respectively, and therefore that moderate improvements on the bottom line even after 2014 are already priced into the current stock price on top of significant growth over the next two years. That may be a bit aggressive for a value investor. We would note that Las Vegas Sands carries a beta of 1.8, which shows that movements of the stock price tend to be highly correlated with- and overreact to- changes in broader market indices.
Billionaire Ken Griffin's Citadel Investment Group increased its stake in Las Vegas Sands by 55% during the third quarter of 2012 and owned a total of 1.3 million shares at the end of September (see Griffin's stock picks). Platinum Asset Management, which is managed by billionaire Kerr Neilson, reported a position of 2 million shares in its portfolio at the end of the quarter (find Neilson's favorite stocks). Maverick Capital initiated a position of 2.5 million shares, making that fund (which is managed by Lee Ainslie) the largest holder of the stock out of the hedge funds and other notable investors in our database of 13F filings (check out more stocks Ainslie was buying).
Two other casino stocks with market capitalizations over $10 billion are Wynn Resorts, Limited (WYNN) and Melco Crown Entertainment Ltd (MPEL). The trailing earnings multiples here are in the 26-28 range, essentially in line with Las Vegas Sands. However, business has not been as good in recent quarters at these two companies. Wynn has also reported its fourth quarter results, with net income falling over 40% from its levels in the fourth quarter of 2011; this was primarily due to worse margins, but revenue was also down. In the third quarter of 2012, Melco Crown experienced modest declines in both revenue and earnings versus a year earlier as well. Because Melco Crown is more concentrated in Macau, and because Macau demand depends on Chinese macro, that company has a very high beta at 2.6. Las Vegas Sands may well be worth its small premium to these two stocks, even though we'd struggle to call it a value in absolute terms.
We can also compare Las Vegas Sands to Caesars Entertainment Corp (CZR) and to MGM Resorts International (MGM). These two casinos are expected to be unprofitable in 2013. Betas are at 2 or higher here as well, partly we would think due to very high leverage. Revenue growth numbers have not been promising at either company. As a result there is significant short interest, particularly at Caesars where 18% of the outstanding shares are held short. We would avoid these stocks.
The market has a general bullishness on the casino industry, though Las Vegas Sands may actually be the most attractive option from a value perspective. While a trailing earnings multiple of 29 is not cheap, this is barely higher than where profitable casinos trade and with the company performing quite well in Q4 we think that it is the most likely to turn out to be a good buy in the event of a strong two years for casinos. It's also possible that there might be attractive pair trades within this peer group.