Las Vegas Sands Rates A Strong Buy, Carnival A Buy

 |  Includes: CCL, LVS
by: Takeover Analyst

Shareholder value has continued to decline for Carnival (NYSE:CCL) following the tragic sinking of the Costa Concordia and, unfortunately, this has been masking much of the firm's strong fundamentals. I anticipate that near-term stock movement will trend downwards due to signs that costs related to the accident may be worse than many analysts initiatively expected. In the meanwhile, I recommend another recreational company, Las Vegas Sands (NYSE:LVS).

Both Las Vegas Sands and Carnival are rated "buys" on the Street. Carnival trades at a respective 12.6x and 11.5x past and forward earnings with a dividend yield of 3.3%. LVS trades at a respective 32.9x and 16.9x past and forward earnings with a dividend yield of 2%. The latter has 260% greater volatility than the broader market and has the potential to drive high risk-adjusted returns in the process.

At the fourth quarter earnings call, LVS' billionaire Chairman & CEO, Sheldon Adelson, noted a commitment to returning free cash flow to shareholders:

Thanks to our financial strength and significant liquidity, we are happy to announce that the LVS Board of Directors has approved an annual dividend of $1 per share, which will be paid at $0.25 per quarter; that is $0.25 a quarter. A geographic diversity in the center of our operations and each of our business locations, or as I've said in the past, the reliability and predictability of our operating results and cash flow has put us in a unique and enviable position, one which allows us to offer much deserved dividend to our shareholders, while at the same time providing us ample resources to aggressively pursue new development opportunities around the world.

The quarter closed a milestone year that broke records for EBITDA, EPS, and revenue. Mass gaming has exploded at Macau and Singapore while several catalysts are still in store to carry forward the momentum. Margins are trending upwards at Macau while the penetration opportunities in Japan provide a key driver to hedge against domestic uncertainty. The company is less risky than MGM Resorts given that LVS has the pricing power to catalyze revenues on the Strip.

Consensus estimates for LVS' EPS forecast that it will grow by 27.3% to $2.57 in 2012 and then by 17.9% and 18.5% in the following two years. Assuming a multiple of 23x and a conservative 2013 EPS of $2.98, the rough intrinsic value of the stock is $68.54, implying 33.7% upside.

In light of the progress that is occurring at LVS, it should be a top investment for those looking for exposure in recreation. Carnival is more of a long-term play. It is the largest cruise company, but plans to slow ship creation to 2-3 per year from an average of 5 over the last decade. This will help the company stabilize the equilibrium point in supply and demand to allow for optimal margins. Over the next five years, it is estimated that around $5B worth of capital will be returned to shareholders.

At the same time, investors are likely to stay on the sidelines as we find out more about the costs related to Costa Concordia. Management believes that the ship loss itself will cost $0.11 to $0.12 in EPS for 20012 and an additional insurance-adjusted $0.10. The company offered surviving victims of the sunken ship a $14.4K compensation package, which reportedly the legal community feels is substantially insignificant.

Consensus estimates for Carnival's EPS forecast that it will decline by 9.9% to $2.18 in 2012 and then grow by 20.2% and 5.7% in the following two years. Modeling a CAGR of 4.6% for EPS over the next three years and then discounting backwards by a WACC of 9% yields a fair value figure of $35.63, implying 16.7% upside.

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