- Catalysts including Macau development, Japan opportunity and return of capital are expected to bode well for the current price uptrend.
- Meanwhile, valuation appears to be compelling as LVS trades at solid discounts to market and peer on a long-term PEG basis.
- A target price of $95, or 21% upside, is warranted given the company's current fundamentals and growth prospects.
Share prices for Las Vegas Sands (LVS) have appreciated by 45% over the past 12 months, outperforming a 20% return for the S&P 500 Index. Despite the spectacular run-up, I believe there remains a significant price upside for two reasons - catalysts and valuations.
The stock has the following promising upside catalysts, which will likely continue to bolster the current price uptrend:
The company's performance momentum in Macau continued to build as EBITDA in the region rose by 35% year-on-year in Q4 2013 and EBITDA margin expanded from 32% to 33% over the year. Management indicated in the earnings call that the company is on track to open Parisian and St. Regis Tower in Q4 2015. It is believed that LVS' current massive presence (i.e. more than 9,000 hotel rooms) in Macau, which remains underserved given the considerable demand from tourists from mainland China, and its large exposure (i.e. 70% of operating income) to the robust mass market should continue to sustain the current growth profile. Citigroup estimated that the Parisian will generate an annual run-rate EBITDA of $934M (compared to LVS' current LTM EBITDA of $4.5B), which implies a return on capital of 35% based on the project development cost of $2.7B. It should be noted that an ongoing non-gaming $20B resort development in Hengqin island, which is next to Macau island, is expected to draw additional traffic from the mainland and benefit the Macau casino resorts.
Another significant development opportunity in Asia is Japan. Based on management's update in the earnings call, it is expected that the Japanese government will likely pass the second piece of gaming legislation this summer. Management also reiterated LVS' front-runner state given the company's success in running the Marina Bay Sands integrated resort model in Singapore. I expect the Japan opportunity to post a very meaningful EPS upside once the plan materializes.
Further, management's commitment to returning capital should continue to buttress the price performance. Management intends to pay a quarterly dividend of $0.50 per share in 2014, which is 43% above the $0.35 per share paid quarterly in 2013. In addition, there remains an $1.5B authorized share buyback under the current plan. Looking forward, I believe there is a fair possibility for an incremental capital return in addition to the current $900M annual target because:
- LVS' current leverage at 2.0x total debt to EBITDA is at the very low end of the company's target range between 2.0x and 3.5x, implying that LVS should either incur additional borrowing or repurchase equity capital if it plans to achieve the mid-range of the leverage target;
- Management suggested that the company has some valuable real estate assets in Macau that are ready to be monetized with sales proceeds estimated to range from $12B to $14B. The company has been preparing for such potential events as it is working with the Macau government to get approval; and
- LVS generated $1.6B free cash flow in 2013, representing a solid free cash flow margin of 11%.
The stock's 2015 forward P/E multiple traded off from about ~22x in early 2014 to the current 18.2x level driven by a modest price pullback and sell-side analysts' upward revisions for the 2015 EPS estimate (average estimate increases from $4.15 in a month ago to $4.50) (see chart below).
Given the above, LVS' multiple of 18.2x now trades at an 18% premium over the same multiple of S&P 500 Index at 15.4x. I view this premium level to be attractive because 1) LVS' consensus long-term earnings estimate at 16.5% is substantially above the average estimate of 9.5% for S&P 500 companies; 2) LVS' dividend yield at 2.6% is also above the S&P 500's average yield of just 1.9%; and 3) there is a share repurchase program supporting the price performance as just mentioned. By factoring in the long-term earnings growth potential, LVS trades at a long-term PEG of 1.1x, which is at a 32% discount to the PEG of 1.6x for S&P 500.
The stock trades at discounted valuations compared to those of Wynn Resorts (WYNN), LVS' closest peer. LVS' forward EV/EBITDA, P/E multiples, PEG trade at 9%, 23% and 8%, respectively, below Wynn's despite the fact that LVS has a better growth potential and less leveraged balance sheet (see chart below).
Assigning a long-term PEG of 1.3x to LVS, this would mean a $95 target price, implying a 2015 forward P/E multiple of 22.0x and a price upside of 21% from the current level.
In summary, the stock of LVS shares the merits of a typical momentum stock with numerous promising upside catalysts ahead but trades at an attractive valuation that is fairly cheap on a relative basis. Hence, the stock should be worth your consideration.
All charts are created by the author and data used in the article and charts is sourced from S&P Capital IQ unless otherwise specified.