Four Risks to Las Vegas Sands' Shareholders

With its stock price up over 800% since its March lows, Las Vegas Sands (LVS) plans to raise up to $3.3 billion in a Hong Kong IPO listing of its Asian assets later this month. While it has great potential upside from its properties in gambling territory Macau, there are still a number of risk factors facing the casino that could cause it to trip its debt covenants on its massive $12 billion in liabilities over the next 18 months. Because of those risks and lax corporate governance oversight, I've initiated a short position on the stock. Here's why.

Risk 1: Losses will persist without a meaningful upturn in operating performance. Despite a surge in Macau-based profits and management claims of cutting $500 million in operating costs from the business, Sands is still losing money, and at an increased rate year-on-year. It had over $1 billion in operating expenses in the recent quarter alone. The bet that bulls on the stock are making is that we've hit bottom and that rooms, banqueting and convention revenue will all come back from current levels. On the recent earnings call, management noted that Macau had done particularly well recently, partially because of increased traffic over the October Golden Week holiday. The company pointed out that Las Vegas room bookings were up for January and February. However, the likelihood of a continued soft market in Vegas (especially with MGM's new CityCenter dumping 5,000 new rooms on the strip next month) seems high, even with Macau. It appears reasonable to assume that losses will persist over the next two years, at a time when it's vital for LVS to navigate its way through its debt obligations.

Risk 2: Debt requirements will only get tighter over the next year. Like its losses, Las Vegas Sands' debt and liabilities have increased over the last year. It had $12 billion in debt as of the end of September -- up 13% from a year ago. LVS's biggest risk in holding such a high amount of debt while losing money is meeting its debt covenants, which include tightening the allowed ratio between debt and EBITDA, currently at a ceiling of 6.5:1 for US-related debt. Management says it is now running a ratio of 5.78:1. Starting July 1 2010, the allowed ratio will drop to 6:1. Then, on January 1, 2011, it will drop again to 5.5:1 and stay there.

Sands has been able to sell stock and debt in order to supplement its EBITDA and stay within its debt covenants. Recently, it pre-sold $600 million in projected proceeds from the planned Hong Kong IPO of its Asian assets later this month, presumably because it needed the extra cash early. Once it completes its public offering, it should receive another $1.7-2.5 billion (net of the already-sold $600 million and the bankers' underwriting fees).

The company has three types of debt related to its US, Macau and Singapore (Marina Bay) developments and operations. All senior debt is held by Lehman Brothers Commercial Paper (or affiliated entities). It appears that Alvarez & Marsal (overseeing the wind-down of Lehman) is now in charge of Sands' debt obligations and they have more incentive to play hardball on enforcing terms compared to a troubled Citibank (C), Bank of America (BAC), or Wells Fargo (WFC). In an interview with CNBC in July, Bryan Marsal talked -- in general terms, not specifically about Las Vegas Sands -- about how many companies were in phase one of a three-phase discussion with their creditors: (1) extend and pretend (that they will somehow be able to bounce back in order to re-pay their debts), (2) amend (the terms of their covenants -- or at least try), and (3) send (as in, send in the keys for the properties to the creditors).

If Sands defaults on one debt obligation, it triggers a cross-default across all its debts. Assuming the losses continue, its new IPO proceeds will help, but the company will still face potential problems later next year, as its debt-to-EBITDA ratio ratchets down.

Risk 3: Continued development in Macau. According to its most recent 10-Q, Sands estimates it will need approximately $2.6 billion to complete development at Macau. It currently has about $3 billion in cash (about the same level as a year ago), plus the new funds coming in from the Hong Kong IPO. It's likely that Sands will need to keep a certain amount of cash on its balance sheet to satisfy its lenders. This means that, even using all the IPO proceeds, Sands will not necessarily have sufficient cash to finish off Macau -- if losses persist.

Las Vegas Sands is required to finish completion of Parcel 3 of the Cotai strip by mid-2011, or risks passing over the keys to all of its Macau assets to the Chinese government. It also needs to build out parcels 4 to 8 (and receive permission from the government), but not as quickly. It is obviously trying to do everything it can to minimize its development costs (right out of the "extend-and-pretend" playbook). Sheldon Adelson is known for slipping delivery deadlines.

However, there are a number of Macau risks (let alone Singapore) that remain, including the potential for weaker traffic in current and future quarters compared with the recent Golden Week-aided quarter, restrictions on travel to Macau by the Chinese government for fear of over-gambling, Sands' need to spend more on ferry access or face reduced traffic, potential cost overruns on existing development and any potential health scare (like heightened concern about the H1N1 virus) that could reduce traffic. Taken together, it seems likely that one or two of these risks might occur in the next year, with a sharp impact on the stock.

Risk 4: Poor corporate governance oversight. You would think that Sands would be holding on to every dollar of cash possible, seeing as how the stock dropped from $140 to $1 and was being questioned as a going concern less than a year ago. But, you'd be wrong. Corporate governance has and likely always will be very poor at this company. On October 29, Sands declared a quarterly dividend of $2.50 per share to the holders of 10% Series A Cumulative Perpetual Preferred Stock. It's not clear how much of this stock Chairman and Chief Executive Sheldon Adelson himself owns, but we know (from the Sands 2009 proxy statement) that his wife, Dr. Miriam Adelson, bought 5.25 million of these shares from the company on November 14, 2008. That means Adelson's wife will collect $13 million on just this one quarterly dividend payment, or $50 million annually -- roughly 10% of their recent $500 million in total cost savings Sands' management boasted about.

My personal favorite egregious expense at Las Vegas Sands involves SVP Rob Goldstein. Goldstein is in charge of Sands' Vegas properties and was front and center on the recent earnings calls. He was paid $3.8 million in total compensation in 2006, $3.2 million in 2007 and $2.6 million in 2008. In the spring of this year, in its proxy statement, Sands disclosed that: "During 2008, a subsidiary of the Company performed work at a home owned by Mr. Goldstein, the Company's Senior Vice President. The Company's cost and overhead for the job was $364,000. Mr. Goldstein believes and the Company agrees that some of the work was not performed in an appropriate manner. The Company and Mr. Goldstein are working together to determine the amount that may be due."

Later, in its second-quarter10-Q release in August, Sands buried in the back under "Other Matters" the following: "As previously disclosed, during 2008, a subsidiary of the Company performed work at a home owned by Robert G. Goldstein, the Company's Executive Vice President. Mr. Goldstein believed, and the Company acknowledged, that some of the work was not performed in an appropriate manner. The matter was referred to an independent expert, who concurred about the quality of the work and concluded that Mr. Goldstein should not be obligated to pay the $0.4 million incurred by the Company for costs and overhead on the job. These findings have been accepted by the Company and Mr. Goldstein."

So, to review, a Sands subsidiary got to do $360,000 worth of remodeling construction work on Goldstein's house - paid for out of Sands' shareholders' coffers and Goldstein gets to enjoy the benefits of the work for free. Who is this "independent expert" and how can I arrange for him to come and adjudicate some faulty remodeling work paid for by Sands at my house?

Clearly, it's "buyer beware" for shareholders at Las Vegas Sands, and Sands makes no bones about it. One of its "risk factors" listed in their 10-K is that "[t] he interests of Mr. Adelson may conflict with your interests."

The bottom line is that Las Vegas Sands' management is betting that the Macau market will stay hot and that Vegas will come back from historic lows this year. My belief is that one or more of the risks cited above will surprise to the downside within the next year - and that's why I think it's more likely the stock will go lower than this, rather than higher, over the next 12 months.

Disclosure: At the time of publication, Jackson's fund held a net short position in LVS and a long position in WYNN.

This article was originally published in TheStreet.com

Comments

[mbkelly75:]

LVS is not best-of-breed and in hard times (and usually in good times also ) best-of-breed is where you want to be for the long term. Best of breed in this area is WYNN - that is where you want to be.

Nov 12 07:21 AM

[Charto:]

Whats your take on MGM with city center opening?? Also short-term where do you put lvs with the ipo in china coming?

Nov 12 08:07 AM

[John Cordes:]

Very nice article. What's your opinion of MGM?

Nov 12 08:46 AM

[Vegasjoe:]

Adelson bellied up $500,000,000 or so in March when they were teetering on the brink; the stock was at $1 so he likely has made a cool $5 billion this year.
But, corporate bookings for conferences are returning to normal so if the convention business is firming in 2010, they may cash flow enough to avoid default.
But, Jackson makes good points: the consumer is still dead, and cash advances on credit cards are slim. China's government limiting visits to once a month hurts as well.

Nov 12 10:03 AM

[mbkelly75:]

MGM is interesting but troubled, too troubled for me. They have huge debt and no earnings. Their Forward Intrinsic Value is $-11.92. A minus intrinsic value is NOT good. Their Altman Z-Score is 0.71 where <1.8 means the chance of financial catastrophe is HUGE. Their Piotroski Score = 2 out of a possible 9 where <=4 means Avoid!!!! Information about all these scores can be found at grahaminvestor.com
They are worth learning about and using to judge stocks from a financial basis.
They have not paid a dividend since 1 Mar 2000. It was 2.5 cents/share and was the one and only time they paid a dividend. Their Total Return over the last 5 years = -62.45% - also not real good. Their 20 Day MA has crossed below the 50 Day MA so they may not even be a good trade stock without some more watching to see where it goes. If the 20 Day MA crosses below the 200 Day MA and forms a Death Cross - they may be a good short sale.

The good news about them is limited. Their P/S Ratio = 0.75 (<1 is good), P/B = 0.95, P/FCF = 10.11 (<15 is good). They are 80.6% insider owned so the owners have skin in the game and institutions are increasing ownership also. With a Quick Ratio of 0.79 - they are not attractive (>1 is good). I would let everyone else have them. They are not for my money.

Nov 12 02:08 PM

[jimmy46:]

Good blog, it's ballsy for you to take such an unambigous stand just before the asian IPO, which went very well for WYNN.

For those tooting WYNN's horn, he's a crook too,
he has many bennies "comped".
He admitted it to reporters who asked about one extravagance.

Like several of the others, I'm curious about MGM too.

Nov 12 02:18 PM

[lvman:]

Why do you ignore the effect on EBITDA of the opening of Marina Bay Sands in early 2010. Seems like you just ignored it, care to explain?

Nov 12 02:40 PM

[uncle frank:]

what is the effect?


On Nov 12 02:40 PM lvman wrote:

> Why do you ignore the effect on EBITDA of the opening of Marina Bay
> Sands in early 2010. Seems like you just ignored it, care to explain?

Nov 12 05:07 PM

[uncle frank:]

Hey ... what about Bethleham PA.???


On Nov 12 02:40 PM lvman wrote:

> Why do you ignore the effect on EBITDA of the opening of Marina Bay
> Sands in early 2010. Seems like you just ignored it, care to explain?

Nov 12 06:08 PM

[ghostpirate9:]

eric you are way off on this one. ask your buddy doug kass at thestreet.com how it has felt shorting LVS since it was at 10 earlier this year. he had many of the same premises in mind. one word: painful!

a few points to ponder...

1. Macau: LVS Macau outperformed in 3Q with total revenues $45M ahead of most estimates and EBITDAR $25M ahead as well. More specifically the margin expansion at Venetian Macao this past quarter was incredible at 30.5% EBITDAR. And the run rate through October is expected to be huge.

2. LVS: Bookings are turning. Group room night advance bookings are already up year-over-year versus 2009. Keep in mind that room rates will get better in 4Q on seasonality and improved occupancy.

3. MBS: You like to point out the debt of the firm but failed to discuss the earnings potential that is in line for the firm on an EBITDA basis. Singapore will be a hit and is a near monopoly for the firm.

Remember, debt can cut both ways.

Please be sure to tell us when you cover your short!

Nov 12 09:35 PM

[mbkelly75:]

As a general rule, I do not short stocks. It IS tempting sometimes, but usually I look for the best place for my money and simply avoid a stock that has too many problems or does not make me comfortable with it. I have missed some good ones that way, but I have avoided a LOT more losses that way than good ones missed. On 2 Nov, LVS's 20 Day Moving Average crossed the 50 Day MA - heading down. I do not know where it will go from here, but I do not invest in stocks that are trending down. They just might continue to go down as Ben Graham said. He preferred to buy stocks after they finished going down and had started back up and so do I. Warren Buffet said "Rule Number 1 is avoid losses. Rule Number 2 is refer back to Rule 1". Buying stocks, especially as a new investment, that are trending down does not accomplish this.
MGM did exactly the same thing on 3 Nov. The 20 Day MA crossed the 50 Day MA moving down. Even if everything else looked wonderful - I still would not buy when they are trending down. I would wait until they showed signs of being all through going down and have started trending up again. Watching the Moving Averages makes this pretty easy to do and clear to see. I am very fond of easy and clear.

Nov 13 09:40 AM

[Goosie69:]

Jim (Cramer) is bullish on WYNN and said to take profits in LVS. Funny i thought about that BEFORE i read the article was posted originally on TheStreet.com. Getting short before the Macau IPO is - risky. My 2 cents (Long LVS since $2.5)...

Nov 13 04:34 PM

[Craig Mille...:]

The writer ignores a lot of things but since his "fund" is short, that might explain the bias. Marina Bay Sands will be a huge success. The fact that Adelson is investing in Asia not the US is also smart. I hope your fund is short a lot of LVS stock Mr. Jackson. You will be feeling a lot of pain shortly.


On Nov 12 02:40 PM lvman wrote:

> Why do you ignore the effect on EBITDA of the opening of Marina Bay
> Sands in early 2010. Seems like you just ignored it, care to explain?

Nov 15 12:02 PM

[novashow:]

I got into LVS in March at $1.68 and never looked back. I am holding onto this one! People are always going to try to find that "big break".

Nov 25 09:16 PM