Las Vegas Sands: Future Looks Bright

|
 |  About: Las Vegas Sands Corp. (LVS)
by: Gemstone Equity Research

Global industry analysts have estimated that the global market for casinos is expected to reach $113 billion by 2013. Numerous factors will play a role in growing the global market and the most noticeable among these are the expected incremental revenues from new gaming facilities at existing casinos as well as new casinos.

Regionally, revenues from the US are expected to grow at a gradual pace but the most important revenue driver in the coming year will be the Asia-Pacific region. Rapidly growing Asian economies, improvement in consumer spending and expected relaxation of imposed restrictions will be the growth drivers.

In addition to this research, Citi has also estimated the gaming revenues from different regions all over the world and this data is shown below.

Click to enlarge

While anticipating this trend earlier, various American companies have entered the Asia-Pacific region to capitalize on this expected growth. In my opinion, Las Vegas Sands (NYSE:LVS) has more opportunities than others. In this article, I will discuss the company's market position and the opportunities available to Las Vegas Sands.

Las Vegas Sands operates all-inclusive resorts that feature casinos, hotels, entertainment, food and beverage, retail and convention center operations. The company owns and operates various properties in the key market areas of the Asia-Pacific region and the U.S such as Macao, Singapore and Las Vegas.

Before getting into the discussion of the unseen future, let us examine the company's past performance.

History

The results of the third quarter of fiscal year 2013 were quite impressive. The company continued to lead the market and made its shareholders happy by increasing its next year's dividend by 43%. Moreover, the company surprised Wall Street, as analysts were expecting revenue and earnings per share growth to be around 28% and 65% but Las Vegas Sands reported revenues of $3568.5 million and an EPS of $0.82 reflecting increases of 32% and 78% year over year.

In addition to beating general market expectations, the company also outperformed its competitors. The above chart shows the profitability of Las Vegas Sands compared to other leading companies such as Wynn Resorts and Melco Crown.

Most Important Growth Driver

The largest gaming market in the world, Macao offers meaningful growth in both gaming and non-gaming revenues to Las Vegas Sands.

Currently the company generates 80% of its revenue from its properties in Macao. The popularity of Las Vegas Sands in the Macao region can also be observed by its phenomenal 40% growth in revenues during the third quarter of fiscal year 2013 (year over year).

The growth is the result of various factors including the movement of Chinese citizens to urban centers in China and the introduction of new transportation infrastructure. But the most noticeable reason for substantial growth is that Macao is the only market in China to offer legalized casino gaming.

Las Vegas Sands was awarded with 200 additional tables in January of this year. The table games are considered to be the most profitable segment for casino operators. The additional 200 tables will serve as a boost to revenues.

Moreover, in anticipation of the massive growth in Macao, the players in the industry are putting their efforts into capitalizing on the growth by establishing new casinos. Las Vegas Sands has been working on its fifth casino in the region.

Risks

Online gaming is becoming popular in most of the developed world and this is certainly a threat to conventional gaming casinos. This potential threat is worrying but what's even more worrying is the decision made by Las Vegas Sands' CEO Sheldon Adelson. The CEO is sticking to the conventional casino industry rather than using the company's brand name to enter the online casino business as well.

"Adelson thinks that online gambling is "suicidal" for the U.S. casino industry in the long run and will destroy hundreds of thousands of jobs. In the short-term, Adelson predicts that U.S. casinos could make money from their branded offerings online, but that non-branded websites would quickly saturate the market with financial incentives that casino-branded offerings would inevitably need to match to stay competitive, eating away at their profit margins. At the same time, Adelson claims, the casinos would be cannibalizing their existing land-based businesses, eventually hurting their revenues and making them vulnerable."

Although the concerns of the CEO about online gaming are quite convincing, leaving the market open for others is not a sensible decision.

In addition to this potential threat, the visa policy of the country also plays an important role. A few years back when the Chinese government limited the visas to Macao, it greatly impacted the revenues of the industry but as soon as the restrictions were loosened the market rebounded. In the coming periods, investors should also keep an eye on these factors as well.

Conclusion

Last year, the company offered a special dividend and also increased the quarterly dividends. This trend of returning value to shareholders seems to be continuing given the company's strong cash flow generation ability coupled with its strong balance sheet.

As the Asian region continues to boom, I believe that the gaming revenues are set to explode in the Asia-Pacific markets in the coming years. However, the risks mentioned above should also be considered before making any investment decisions.

(Source: Yahoo Finance)

Las Vegas Sands is a bit overvalued compared to Wynn resorts because investors are willing to have faith in this growing company even if they have to pay some premium. I also think that stock is overvalued but keeping in view the anticipated growth this small premium over intrinsic value should not matter much. Therefore I recommend buying the stock.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Business relationship disclosure: The article has been written by a Blackstone Equity Research research analyst. Blackstone Equity Research is not receiving compensation for it (other than from Seeking Alpha). Blackstone Equity Research has no business relationship with any company whose stock is mentioned in this article.