Share price of Las Vegas Sands (NYSE:LVS) has recovered by 55% from its 52-week low of $34.72 touched in August 2012. In my view, the current price uptrend is likely to persist for a while and the stock is a buy at this level based on the following five reasons:
1. From a relative valuation perspective, LVS shares remain cheap based on the company's strong financial performance relative to its peers' (see chart below). Consensus estimates on average predict LVS' revenue, EBITDA, and EPS to grow at 2-year CAGRs of 12.6%, 19.4%, and 29.2%, respectively. The figures are considerably above the averages of just 6.6%, 11.0%, and -27.5%, respectively, for a group consisting of LVS' primary industry peers. Similarly, LVS' long-term earnings growth is forecasted to be 13.1%, beating the peer average at 3.8%. On the profit side, LVS continues to demonstrate a superior performance as the firm's various profitability margins and capital return metrics are markedly above par. LVS carries a relatively low debt load as reflected by its below-average leverage ratios. In terms of liquidity, the firm's trailing free cash flow margin is above the peer average. Due to the strong margins and the lower leverage, LVS was able to maintain a healthy interest coverage ratio. Both the company's current and quick ratios are above par, reflecting a healthy balance sheet condition.
To summarize, LVS's financials significantly outperform its peer group in almost every aspect, and such robust performance should reasonably bolster a premium stock valuation. Nevertheless, the current price multiples at 12.2x forward EBITDA (next 12 months) and 19.8x forward EPS (next 12 months) are trading almost consistent with the peer group, suggesting that the shares are modestly undervalued on a relative basis (see chart above).
2. In the past few years, LVS experienced the following fundamental improvements:
1) LVS has been able to generate a higher return on investments as reflected by its rising ROE, ROIC, and ROA measures.
2) The company has also been able to produce higher profits and its consensus EBITDA estimates suggest a continued trend of margin expansion.
3) Given the decreased capital spending and improved operating cash flow, LVS has become a free cash flow generator since 2011.
4) The company has been deleveraging since 2008 and achieved a substantially higher interest coverage ratio.
3. Market sentiment on LVS also appears to be favorable. The company's consensus revenue, EBITDA, and EPS estimates have experienced multiple upward revisions since 3 months ago. Analysts' average long-term EPS growth estimate has also trended steadily over the period from 13.05% to 13.13% and the average target price has been raised from $51.98 to $60.00 (see charts below).
4. LVS initiated its first dividend in 2012 at $1.00 annualized and has raised it once since then to $1.40. Given the company's healthy free cash flow growth prospects (i.e. continued growth in operating cash flow with limited capital expenditure) and the fact that the annual dividend paid in 2012 only represented slightly more than half of the annual free cash flow generated, I believe LVS would be capable to raise the dividends at a double-digit rate in the coming years.
5. Analysts are generally very bullish on the stock. Of the total 26 stock ratings compiled by Thomson One, there are 6 strong buys and 15 buys. In a research note dated March 6, 2013, Chad Mollman at Morningstar commented on LVS' growth prospects, which I tend to agree on (sourced from Thomson One, Equity Research):
"Las Vegas Sands is the casino operator best positioned to benefit from the rapid ascent of Asia's casino market, with about 85% of its sales derived from the region. Sands China, which generated nearly 60% of the company's revenue in 2012, is generating outperformance in the China market, due to its focus on the mass market, and its dominant position on the Cotai Strip in Macau. Sands China generates approximately 75% of its cash flow from the mass market, a market we expect to grow by approximately 30% in 2013, in contrast to the VIP market, which we expect to grow by only 5% to 10%. Sands China controls over 50% of the gaming tables on the Cotai Strip, and we expect the company's new Cotai Strip casino, Sands Cotai Central, to continue to take market share from casinos on the Macau peninsula in 2013."
Bottom line, in the light of the promising growth prospects for LVS, solid company financials, and compelling valuation, investors should consider chasing the current price momentum as there remains a solid price upside.
All charts are created by the author except for the consensus estimate tables, which are sourced from S&P 500 Capital IQ, and all financial data used in the article and the charts is sourced from S&P 500 Capital IQ unless otherwise specified.
Disclosure: I am long LVS. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.