Las Vegas Sands: Searching For The Bottom In Macau Stocks

Jun.16.14 | About: Las Vegas (LVS)


Las Vegas Sands and other stocks in the group are selling off on lower growth in Macau in May.

Analyst downgrades and a potential crackdown on money laundering in Macau is hurting the group too.

Growth prospects and valuations are very attractive, and the latest sell-off is a buying opportunity.

Las Vegas Sands and Melco Crown continue to be the stocks with the most potential in the group.

The last three months have been very bad for Las Vegas Sands (NYSE:LVS) and other stocks involved in Macau. Weak May numbers have caused analyst downgrades, and the potential crack down on money laundering in Macau should also hurt the revenue in the gaming district. However, the sell-off has created a buying opportunity, since the valuations of the stocks in the group are more favorable. The growth in Macau will continue despite the short-term weakness, and the stocks in the group should continue to benefit.

Worries about Macau's growth prospects are overdone

Recent trends in Macau are certainly in favor of a growth slowdown in the region. Macau casino revenue grew only 9.3% in May, as opposed to estimates for 13% to 15% growth. Las Vegas Sands and other stocks in the group were already in a downtrend before the news, partly on worries that the authorities in the region will crack down on the use of government-backed UnionPay card. Gamblers and shoppers use the cards, and this might have a negative effect on the revenues of casino stocks in the region. Revenue in June should continue to be weak, as Wells Fargo expects that the World Cup will be a distraction for casinos.

However, these trends should be temporary, and the growth in the Macau region is still expected to be strong through the rest of the year. Most growth estimates are between 11% and 15%. The slowdown is already largely priced in, as Las Vegas Sands' valuation has come down significantly over the last few months, as well as for Melco Crown (NASDAQ:MPEL), Wynn Resorts (NASDAQ:WYNN) and MGM Resorts (NYSE:MGM). In my previous article, I explained why Las Vegas Sands and Melco Crown are the best casino stocks in the group, as their growth prospects are the best among the mentioned peers. I still expect that both stocks should outperform Wynn Resorts and MGM Resorts in the future. In the table below, you can see the latest growth numbers and valuations of the four stocks. As you can see, the forward P/E multiples are already around 15, and these numbers are low, based on the earnings growth potential of Las Vegas Sands and Melco Crown.

Source: Yahoo Finance

Asymmetric reward/risk opportunity?

In the chart below, you can see Las Vegas Sands' P/E ratio since 2012. Las Vegas Sands' TTM P/E is now the lowest it has been since July 2013. It has some 10% downside potential from here to get to the lows it reached in July 2012. Since both lows took place in the summer, we might expect Las Vegas Sands to bottom once again in July. The upside potential in the next two years could be between 25% and 55%, given the valuation range in the previous two years. This is based on the P/E ratio range between 20 and 25, since I have discounted the potential multiple if the growth slows down more than it is anticipated at the moment. The upside potential is above 55% if Las Vegas Sands' P/E revisits the higher part of the two-year valuation range. Similar could be said about Melco Crown, and the upside could be in the same range as Las Vegas Sands', since both companies share a similar growth profile, as opposed to the slower growth expected from Wynn Resorts and MGM.



The recent sell-off has created a strong buying opportunity for long-term investors. Las Vegas Sands and Melco Crown are trading at the low of their valuation range in the past two years, and their growth prospects are still compelling. I believe that additional downside should be limited to 10% to 20%, while the upside is between 20% and 55%, giving investors an asymmetric reward-risk investment opportunity.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.