We last issued a report on Las Vegas Sands (LVS) on July 31st of this year. We cited several growth drivers for the stock, and noted that the company was still undervalued and a good growth and dividend play at $56/share. Today, a day before earnings are announced, the stock is sitting pretty at over $69/share, close to a 25% gain in a little over three months since the recommendation (compared to an almost 0% gain over the same time frame of the DJIA). After such a run up, considering year-to-date LVS is up almost 50%, is the stock still a buy? Several factors point to us reiterating our buy call, ahead of the earnings and into the end of the year.
Golden Week, a 7-day Chinese national holiday celebration beginning on Oct. 1st, was an unadulterated boon for Macau casinos. A Citi analyst research note discussed "mass growth" that drove margin expansion in Macau, as the mass market grew 37% year-over-year and the VIP segment growth 13% year-over-year. This all points to a record year for the Macau casinos, and Las Vegas Sands is positioned to reap substantial rewards for operating one of the finest casinos on the Cotai Strip. Indeed, even retail sales are expected to be strong in Macau, "thanks to the tourism boom along with the development of the gambling industry." "Record revenue" is what you want to hear about a company when considering whether to buy, and we expect LVS to report handsome gains from their Macau segment.
From the last quarter's earnings call, CEO Sheldon Adelson already announced record visits to the Macau properties, with stunning mass table growth of over 60%. He must be giddy to announce record visits to Macau once again, and we fully expect it too, given the nature of widely held beliefs that Golden Week was record-breaking this year. Last quarter, LVS missed analyst expectations but wasn't widely punished by the markets because its normalization, or a way of gauging a casino operator's results by seeking to control for luck, indicated the company's "luck" was a bit lower than normal. We should pay close attention to the normalization during the earnings call, in case the EPS is affected by "bad luck" once again.
Long term, LVS continues to work on its Parisian Macau casino, which has been slated to be completed in 2015. We should check in on how the development of the casino is progressing, and be watchful of how LVS can continue to capitalize on growth in the region. We are wary of the ability of the Chinese economy to stabilize at around 7.5-8% GDP growth, but the Chinese central bank will be releasing Q3 numbers which should be in line with these expectations on Friday, after LVS reports. The importance of the Asian properties to the company's long-term growth cannot be understated, so we will be listening to the call and looking at the numbers upon their release for an idea about how the Chinese economy has performed.
Finally, the dividend yield of LVS has suffered because of the excellent performance of the stock, now clocking in at just above 2% yield. We still expect a special dividend for the next quarter as well, though the stock buyback program may be tying up some cash that LVS would like to return to shareholders. The program should help EPS however, as earnings per share is expected to rise as fewer shares are available (the denominator of the equation is shrinking as a result of the program). This should also help LVS report admirable numbers.
Checking back in with this stock, we believe it remains a strong buy. The earnings call should be rewarding for shareholders, as a record-setting Golden Week will likely propel the numbers higher, while the long term drivers of growth continue to hum along.