Las Vegas Sands - Macao Slowdown Is Evident In Second Quarter Results

Jul.17.14 | About: Las Vegas (LVS)

Summary

Las Vegas Sands reports disappointing revenues and earnings.

Slowdown in Macao is impacting results, causing uncertainty for the near term outlook.

Premium valuation, leveraged balance sheet and reliance on Macao makes me hesitant to invest at current levels.

Las Vegas Sands (NYSE:LVS) reported a disappointing set of second-quarter results on Wednesday following the market close. The report only triggered a modest sell-off in after-market trading as I believe shares are not appealing at all at current levels.

The high valuation, leverage and reliance on Macao are my main reasons to be cautious.

Second Quarter Highlights

Las Vegas Sands posted an 11.8% increase in second-quarter revenues which came in at $3.62 billion, which is far below consensus estimates at $3.79 billion.

Reported earnings to Las Vegas Sands' shareholders rose by 26.7% to $671.4 million. Thanks to modest share repurchases, earnings per share growth was even quicker with earnings coming in at $0.83 per share on a fully diluted basis.

Non-GAAP earnings totaled $0.85 per share, but missed consensus estimates by four cents.

Looking Into The Performance

The outspoken Chairman and CEO Sheldon Adelson was pleased with the performance, driven by the power of the Integrated Resort business model. Part of this success were the 17 million visitors welcomed in the company's properties in Macao. Adelson remains very optimistic about the properties on the Cotai Strip, as the Parisian Macao will be opened late in 2015.

Growth was seen at all the subdivisions of the company, although casinos of course drive the topline results. Total casino revenues rose by 12.7% to $3.01 billion, now making up 83% of total sales. Rooms, food and beverage, malls and convention proceeds made up the other revenues after accounting for promotional allowances.

Of course, the main focus of the company is in Asia and Macao in particular. Combined, the Venetian Macao, Sands Cotai Central, Four Seasons Hotels Macao and Sands Macao, generated revenues of $2.36 billion during the quarter, or 65% of total revenues. The Venetian Macao remains the company's top property, generating over a billion in sales.

The second best property is the Marina Sands Bay in Singapore, generating nearly $805 million in sales, while the namesake Las Vegas operations now make up less than 10% of total proceeds.

Looking At The Balance Sheet And Valuation

By the end of the quarter, the company held $3.29 billion in cash and equivalents. Total debt as a result of the massive capital investments, has risen to $10.38 billion which results in a $7.1 billion net debt position.

On a trailing basis, Las Vegas Sands has posted sales of close to $15 billion while net earnings came in at little over $2.6 billion.

At $72 per share, equity in the business is valued at around $58 billion. This values equity in the business at 3.9 times sales and 22-23 times annual earnings.

Looking At The Past Performance, To Gauge The Future

Of course, the past decade has been spectacular as Las Vegas Sands has become the dominant player in Macao. Revenues of just $1.2 billion back in 2004 have risen to $15 billion currently.

This was not an easy process, however. The indebtedness, high investments in China, and reported losses during 2008/2009 resulted in severe financial distress during the crisis. As a result, the company now has 150% more share outstanding compared to 2004, yet revenues and earnings per share are still up significantly.

Shares which peaked at $140 in 2007 fell to lows of $2 during the crisis, creating huge returns for those who dared enough to pick up shares at those levels. Shares currently trade at $72 per share, which adjusted for the dilution following the financial crisis translates into an equivalent price of $180 per share after correcting for the dilutive offerings.

From highs around $88 in March, shares have seen a nearly 20% correction. Note that the company relies heavily on the Chinese economy and especially the focus on the crackdown of corruption has caused worries about the growth prospects in the country. With the new Parisian resort opening next year, the company will only increase its reliance on China.

Final Takeaway

Las Vegas Sands remains of course a very cyclical business, and while it has traditionally been a US company, it now relies largely on Asia for its revenues. With the new casino in Macao expected to open next year, and long-term plans in Japan on the radar, this reliance will increase even more. While this concentration is very lucrative at the moment, it might be a risky move in the long term.

This reliance is a worry. While the debt position is relatively high, strong earnings, cash flows and the completion of large projects will allow the company to deleverage rather quickly. I see greater risks in the high valuations with earnings multiples being in the low twenties.

These high valuations still imply growth, and it was growth which was disappointing. Worries about a Chinese slowdown and the crackdown on corruption seems to have a real impact on gambling revenues in Macao. For June, the industry reported the first fall in total gambling revenues which fell by 3.7% to $3.4 billion for the month, driven by the World Cup as well. While revenues are anticipated to rebound in July, it will most likely not be in the double digit results.

As such, the worries about a slowdown could easily push revenue growth into single digits later this year. Combined with the worries about the Chinese economy, a premium valuation and quite some leverage on the balance sheet, I have enough reasons to remain cautious and remain on the sidelines.

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.