The Chinese economy is gradually shifting towards a consumer-based economy, which is upsurging the spendings for entertainment, travel, and gambling. This improvement is leading towards more travelers visiting the country. In China, gambling is legal only in Macao, which is attracting travelers around the world. With this growing scenario, various resort and casino companies are monetizing opportunity by expanding their operations in Macao. One such company is Las Vegas Sands (LVS), which is expanding aggressively.
Expansion plans in Macao
Macao, a place known for gambling worldwide, generates 80% of Las Vegas Sands' revenue. The company recently reported its third quarter results, where its business in Macao witnessed a robust growth rate. Cash flow from Macao increased 60.8% year over year to $784.3 million.
Presently, Las Vegas Sands is developing a resort in Macao known as Sand Cotai Central. This is a $4.4 billion resort, which opened last year in April while continuing to expand. Since its opening, it has attracted large number of customers, which generated $736.6 million revenue in its third quarter, up by approximately 26% quarter over quarter.
This project is undergoing several phases of updates, and in the view of its growing revenue, the company has recently decided to commence its third phase. In this phase, it will develop a fourth hotel and a mixed use tower for providing commercial and residential facilities in the resort, which will cost around $450 million. Succeeding with the third phase, this resort is expected to be a more attractive for destination visitors and lead towards higher revenue for the company.
Besides the upgrade of its Sand Cotai Central resort, Las Vegas Sands is also developing a hotel on the Cotai Strip of Macao; which will include 3,000 Parisian themed rooms, which will cost $2.7 billion. This hotel is expected to open by the end of 2015 and will enhance its revenue stream.
With this positive outlook, an analyst from J.P. Morgan has re-estimated and raised the company's earnings for 2014 from $3.33 to $3.6 per share and from $3.74 to $4.07 per share for 2015.
Another player in the industry is expanding in Macao to monetize the growing opportunities. Wynn Resorts (WYNN) is building a resort named the Wynn Palace on the Cotai Strip in Macao. This resort will cost around $4 billion and is expected to open in mid 2015. This will be the company's first business at Cotai. Wynn's expansion in the region of Macao is expected to increase its earnings, as the company missed analysts expectations in two out of the last four quarters. Analysts are expecting its earnings per share to surge from $6.72 this year to $7.23 by the end of next year.
Making shareholders happy
Las Vegas Sands' free cash flow has witnessed a positive upsurge since 2011, prior to that it was generating negative free cash flow. Since then, its cash flows has witnessed a CAGR of 278.15%. With this robust growth rate, Las Vegas Sands has returned $4.5 billion of cash to its shareholders, through its share repurchase program and dividend payouts in the last 18 months.
Last year, Las Vegas Sands repurchased 46.56 million of shares with its strong free cash flow. The management authorized a $2 billion share repurchase program on June 5, 2013, which it will complete in the next two years. In the last four months, the company repurchased 5.48 million shares, worth $346.5 million. It still has $1.65 billion left in its stock buyback program, which will significantly impact its EPS.
Las Vegas Sands doesn't have a long dividend history, but it has distributed dividends over the past two years. The company is increasing its dividends every year, and recently it announced a 43% hike in the dividends for 2014, bringing it to $2 per share, or $0.50 per quarter. At the current stock price, this gives us a dividend yield of 2.73%, which is a considerable dividend yield in the Resort and Casino industry.
Another player in the industry, Carnival (CCL), is distributing dividends to its shareholders. Although its stock price has fallen by 7% year to date, and its earnings this year have fallen by 31%, the company is still distributing dividends to its shareholders on a regular basis. But its future dividend payments are expected to witness a downfall on account of its weak third quarter results, where its profits declined 30% year over year. With this, its forward dividend yield is expected to fall to 3.10% from a trailing dividend yield of 4.50%.
Las Vegas Sands has performed magnificently in Macao, and with its various expansion plans, it will continue to take advantage in this growing Chinese economy. With its strong fundamentals and earnings upsurge, the company is distributing cash to its shareholders through dividends and stock buyback plans, to enhance investors' confidence. These factors makes us believe that this stock poses an interesting investing opportunity.
Additional disclosure: Fusion Research is a team of equity analysts. This article was written by Shweta Dubey, one of our research analysts. 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.