Las Vegas Sands Bear Run Not Over Yet

| About: Las Vegas (LVS)

Summary

High exposure to Macau likely to continue to drag on earnings results going forward.

Expectations of the dividend overtaking EPS could see a reduction in shareholder payouts.

Fairer valuation of Las Vegas Sands shares does not make them a bargain considering market conditions.

With many seasoned investment professionals and analysts upgrading their view of Las Vegas Sands (NYSE:LVS), it remains abundantly clear that catching the falling knife is not an especially promising investment strategy in the current market environment considering the risks to the outlook. The casino operator has seen shares in a bear market since 2014 and have continued to fall since, underperforming broader market indices during the time period. Most recently, the weak 2016 performance raises a number of issues about the company's exposure to China and how it intends to maintain the dividend despite reduced earnings and a challenging environment for gambling globally.

Could The Optimistic Analysts Be Wrong?

While analysts are current largely split in their position of a strong buy or hold, the precipitous decline in Las Vegas Sands shares over the last few weeks is evidence that Las Vegas Sands is no defensive play for investors looking to weather the storm encircling equity markets. Asia remains the epicenter of the current ongoing crisis of confidence with China attributed to the lion's share of the losses. After reporting the lowest GDP growth in 25 years, it is obvious that Chinese fundamentals are shifting. With Las Vegas Sands and other major casino operators increasing their presence in major gambling hubs like Macau over the last few years, it has vastly increased exposure to Chinese fundamentals. The sustained crackdown on junket operators and ongoing fight against corruption has seen Macau's fortunes tumble, with revenues down 34.30% in 2015 according to officials, falling to the lowest level since 2010.

Revenues in Macau have fallen for 19-straight months, underlining the concerns about the outlook going forward for the region which exceeds Las Vegas revenues by a wide margin. Although certain analysts have expected this trend to change in the coming months, a weakening of the Yuan combined with heightened efforts to move cash out of China recently will continue to be a drag on 2016 results. The new restrictions in Macau on payment mechanisms have not only hurt the lower end customers, but also seen VIP figures plummet as well. Currently, only 141 VIP junket operators remain in business after 35 recently lost their licenses to operate following a failure to provide the proper documentation to gambling regulators in Macau.

The Silver Lining

The bullish case for Las Vegas Sands is being touted by sell-side analysts, but the shares might not be the best value quite yet. With earnings set to be announced next week, there definitely is potential for shares to show some life after the battering of the last few weeks, falling -15.12% since the outset of 2016. Consensus estimates currently forecast earnings per share of $0.65, marginally below the 3rd quarter which posted results of $0.66 per share. For fiscal 2015, earnings of $2.58 are expected with forecasts currently anticipating $2.51 per share for fiscal 2016. However, additional downward revisions should be expected considering the sustained drop in Macau revenues and no expected improvement in the region's fundamentals over the near-term as both VIP and mass market gambling revenues fall.

There are a few notable factors that are likely to sway certain investors, namely the dividend yield which appears as a "screaming" buy for income investors. However, the value of the dividend remains highly dependent on the company's ability to maintain the payouts during this challenging period, especially with earnings per share projected to be increasingly below the current dividend payout rate of $0.65 per quarter. At the current yield of 6.99%, Las Vegas Sands shares are every income investors dream. However, based on the expectations for 2016 earnings, there is a heightened risk that the dividend will be scrapped. If the results of slashing a dividend are comparable to what transpired with Wynn shares following their own announcement back last year, Las Vegas Sands shares are in for another leg lower in prices.

Poor Fundamental Performance

Since the outset of 2016, Las Vegas Sands shares have widely outpaced the -9.03% return in the S&P 500 over the same period. Though the current price-to-earnings ratio of 13.38 is gradually approaching a fairer valuation considering the headwinds faced by Las Vegas Sands shares from weaker revenues, it still represents a far more attractive value than peers like Melco Crown (NASDAQ:MPEL) (P/E TTM of 35.24) or Wynn (NASDAQ:WYNN) (P/E TTM of 29.34). Nevertheless, the valuation should not mask the fact that Las Vegas Sands is in the midst of a revenue recession, with top line results falling for the last 5-quarters. Income has not been immune, falling -22.68% through September, and highlights the continued struggle to operate at a profit during a period of tumbling revenues.

Cash flow remains a bright spot in the financials with free cash flow still in positive territory as of the last quarter and net operating cash flows in positive territory as well. However, the pervasive mentality of "if we build it they will come" that has dominated the investment thesis in Macau looks like a vast money pit, especially considering the gaming revenues continue to plunge in the region. Although the shifting focus to entertainment may help ease the burden to a degree, capital expenditures remain high and cost-cutting measures can only do so much to bolster the financials in the near-term. The sheer size of the exposure to Macau has been a big leveraged bet by casino magnates, one that does not yet appear to be paying off.

Sell The Rebound

Trying to catch a falling knife in this market environment is very short-sighted. The retorted buying opportunity pushed by sell-side analysts is another strong reason not to buy into the idea that shares are due for a prolonged bounce and turnaround. While arguably value at current levels, market conditions due not dictate this moment as the time to fight the trend lower. With share prices trending right above 52-week lows, selling on the next bounce is an appropriate strategy with the intention of targeting $32 per share for the time being. Over the medium-term, should Las Vegas Sands manage to maintain the dividend, investors that believe in Adelson's vision and are willing to wait out the storm would be wise to start accumulating Las Vegas Sands shares simply for the income generation. However, until equity markets bottom and the outlook for Macau clears, rationales to buy into casinos remain absent.

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

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.