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By Howard Jay Klein
"A man who waits for a roast duck to fly into his mouth must wait a very long time..." Old Chinese Proverb
The economic and stock market forecasts these days are getting to resemble the all you can eat groaning board buffets of Las Vegas casinos. You pop your eyeballs, make your choices and fill your plate. In the mood for sautéed bear meat? There's plenty there for the taking. There's no shortage of skittish gurus convinced we could be facing as much as a 30% or more collapse in equities this year citing all the usual suspects. There's the slowdown of the Chinese economy and its collateral damage effect. Add still shaky oil prices, junk bond jitters, false face US job numbers, deteriorating retail revenues and massive retail store closings and you get raw bear meat.
Hungry for bull steaks? No problem there either. Just read the salivations of optimists who weigh in with happy talk about those same job numbers, strong US dollar trends, a housing boom that would be bursting at the seams but for a severe labor shortage (Believe it or not, that's the mantra). Furthermore, Janet Yellen's uncertain hand on the tiller of the Good Ship USS Fed keeps sending us confused signals and keeps the free money tap wide open. Looks like she'll bypass the rate hike dishes and stick with the near-zero calorie salad bar - for now.
So having stuffed yourself at this buffet of facts, figures, charts, diagrams, and some genuine wisdom intermixed with pure buffoonery, what do you come away with to guide your investing path?
I don't know about you, but I get indigestion. Listening to too many gurus weighing in on ups, downs and calls on market timing gives me heartburn.
Let's move on to something that's good real flavor. The upside taste of Las Vegas Sands (NYSE:LVS) on the move.
Why a move on Las Vegas Sands now?
Drilling down closer to home territory, I've plowed through dozens of calls on gaming stocks over the past 12 months made by many gurus who follow our industry. And again it's a mix: lots of algorithms, charts, targets and rear-view mirror changes of mind and numbers. But fair enough, given the gyrations and distortions of the Macau tumble, these aren't easy calls. We're all just trying to employ the best investing ideas in the service of readers.
Nobody's perfect, even near perfect, always prescient nor repeatedly stupid about forecasting the movement of shares. We all cook with water.
We all have our metrics. We all put a degree of faith in things like EPS, PEG, multiples, moving averages, etc. All valuable criteria - to be certain - until someone invents something more reliable. As Ben Bernanke once said when his Fed models were challenged, "it takes a model to beat a model." Sorry Ben, you were and are dead wrong. The only thing that beats a model is the real world behavior of human beings. You keep your models pal. You know, the models the Fed has been using for decades? Here's its scorecard: Since 1945, there's been 12 recessions. And the Fed's forecast track record? 0 for 12. In the immortal words of former NY Giants, Dallas Cowboys and NY Jets coach Bill Parcells, "You are what your record says you are." Case closed Ben; back to Princeton and no soup for you.
What I attempt to provide in my SA contributions as an industry insider is real-world 360-degree context. Also, to be brutally frank, apply some gut instinct built up over a 25+ year career as a gaming executive and consultant.
I have my own set of metrics which I have blended into the standard ones named above. They are:
1. My sense of the market trends in which gaming companies operate based on my own research along with those of industry colleagues who are presently on the firing line.
2. My evaluations of management quality based on my observation of actual performance over time, the policies and programs of former and present colleagues, clients and industry contacts.
3. My strong conviction, acquired over many decades, that while the surface manifestations of casino customers may quite naturally vary, down deep gamblers and gambling tourists generally operate out of the same pools of human motivation. Whether they're sitting at a slot machine in Mississippi or at a baccarat table in Macau, a gambler is a gambler. They all listen to the beat of the same drummers.
4. My deep dive into the revenue analysis beyond gross numbers often arrive at different forecasts for casino shares than those of standard analytical tools generally produce. I study things like average bets over time, average time at play, type of games played, win per occupied gaming position among competitors. I look at dining, shopping and room amenity preferences by market, and a very key one I created:
Tracking time allocations per player trip
I developed this metric long ago to profile a customer's gaming trip by these elements: travel time to destination, time spent dining, at shows, shopping, in lounges, clubs, sleeping, just wandering the property, visits to other casinos, check in and check out. Naturally, I factor in the most vital metric of all: actual percentage of trip time at tables or machines as a percentage of total hours spent from check in to check out. Clocking total time on property vs. gaming time can be very enlightening.
All these have been remarkably predictive over time for me as an executive planning strategy and now as a consultant servicing clients.
When you read my SA posts most - not all - of the time, the conclusions drawn reflect these evaluations that go into my stock picks. Think of me as a piano tuner with his tuning fork listening to the plunking of notes one by one trying to find the best clarity of tone for each key.
When Wynn (NASDAQ:WYNN) was sliding south fast to around at $55 last January, I called it an $80 stock by mid-2016 against a lot of bearish sentiment surrounding it and the entire Macau gaming sector. My piano tuner mantra then and even before then was: Never Bet Against Steve Wynn.
At this writing, Wynn is trading at $95. As Wynn's shares swept easily through $80 on the basis of improving Macau news, I raised my target to $125 by Q2 or early Q3 this year, listening to what I know will be a bust out reception to Wynn Palace when it opens late June. Plus lots of other reasons including a modest but sustained upside tick in Macau GGR. Time will tell if I've hit the correct notes again. For Wynn, my sense was this: disruptive conviction was finally reaching the fence sitting bears and that moved the stock too.
I now hear the same rumble of the same disruptive conviction getting louder on Las Vegas Sands
At writing, 52-week LVS trading range: $34.88 to $59.90
My call has been and continues to be: $70 to $75 by late Q3 this year
Price at writing: $55
Price at my first call back last winter: $42-44
I have continued to believe and shared that belief with SA readers for eons it seems, that Las Vegas Sands is ridiculously mispriced. There have been reasons for dissent to my view from commenters and some observers both here and abroad. And that dissent was usually based on standard, reasonable views of existing or projected performance. I have no problem with some of the basis for the bearish outlooks of some analysts at all.
But as I've said, I listen to the plink of my own tuning fork as well as the sage guidance of many fine analysts. I like my tuning fork better. And right now, the sound is getting clearer every day that we are still at an entry point for LVS that bears lots of upside for patient investors.
Last week Macquarie Research upgraded LVS to neutral because its analysis had revealed that Macau GGR would narrow this year from a previously forecasted call of minus 12% to minus 6%. The company had based its sunnier outlook on a macro gaming index that to it indicated a new generation of VIP gamblers might be forming post 2015 collapse.
"The MMGI is derived from a multiple regression analysis based on three pillars," Macquarie wrote. "1) China residential real estate investment growth 2) China off balance-sheet financing growth and 3) China import value growth. The FY 16E/17E GGR growth rates implied by MMGU are -10-9% YOY."
Based on these numbers, Macquarie raised its price targets for the six Macau operators to +2% to +17% with Sands China (OTCPK:SCHYY) moving from neutral to Outperform. We think those numbers are fine, but on the shy side of where we think LVS is headed.
Our latest take on LVS: $75 by Q3 or early Q4
Current consensus targets LVS to a high of $59, about a 9% upside from where the stock now sits.
Our call has targeted LVS at $70 for many months, which we now move to $75 not so much because of the Macquarie upgrade - though its supports our view that LVS remains mispriced. But because we hear the tinkling of the piano keys we're tuning getting louder every week.
1. Last week I talked with several Macau sources on the possibility of the appearance of what I believe will be the migration effect of player behavior. This happens when less esoteric factors than those employed by the regression analysis above come into play - pun intended. And they are based on the economic behavior of real people in real situations. And my 25+ years in the business watching and interacting with players up close.
My query to Macau colleagues was this: Were they seeing the early formation of a new segmentation of the player base from the holy trinity of current marketplace GGR? The standard: VIP. Premium Mass and Mass? My piano tuner's instinct tells me we could we be seeing a sea change. And if so, would LVS be getting a disproportionate share of any improvement of Macau GGR we expect to see in the coming months. Most of my sources, all casino firing line executives, agreed something new was forming as the GGR trinity blurred.
There are probably a dozen factors that impact behavior on the gaming floor. The most predictable of these behaviors are emotional/family responses to accumulated wins and losses disrupted by change. I can cite statistics, but it's easier to be anecdotal for the moment to make a point about customer gaming activity changing with personal circumstances and macro economics. What follows is just an example of one of many different motivations that can cause the sea change in Macau.
A terrific Chinese customer we'll call Mr. C. routinely visited a property at which I ran marketing where his average bets ranged from $3,000 to $10,000 a hand in blackjack and baccarat. One year his losses began piling up badly. Visiting his suite, I witnessed him being harangued by his wife that he was squandering the inheritance of his children and grandchildren. She demanded, and was given, control of the account Mr. C. used for his gambling buy-ins and marker payments.
Mrs. C. doled out his money limiting him to $25,000 in available cash per trip and instructed us to cancel his credit line. We did just that. In time, Mr. C, whose average losses had once run into $250,000 per trip, had moved down the VIP scale dramatically. His win/loss range had shrunk to an average of $15,000/$20,000 per trip, but he still played on and was still valued of course. But he'd migrated from top shelf VIP to high Premium mass, although we didn't have those categories so precisely segmented back then. That's what we'll see in 2016 in the new migration.
The new Macau market matrix forming looks to me like this:
1. VIP has shrunk dramatically as we all know. It will trickle back but nowhere to where it previously was, representing over 50% of all Macau GGR pre-crackdown. I believe there is wide agreement about this. My view on the record is that Wynn Resorts will be the major beneficiary of any VIP recovery because it will cluster the high-end business better than anyone else when Wynn Palace opens in June.
2. Blended Premium Mass. This is our redefinition of the segment we think more realistically reflects the market we will see this year. Its base will be the standard premium mass to which has been added a feed of former VIP players, the new Mr. Cs if you will. These are customers bruised by some economic dislocation whose gaming budgets will be trimmed. We will see this by lower average bets, and fewer trips. This new segment will benefit from government stimulus to small business, the economic backbone of premium mass. VIP will be feeding economically chastened players to the new Blended Premium mass base. LVS properties will be the principal beneficiaries due to its existing room count plus the bump from the Parisian by Q4.
3. Lower Premium Mass. This is the new category we have teased out from our Macau conversations, experience and observations. It will be comprised of the lowest end of the former premium mass business. These are customers who will have also curtailed their average visit spend but not to the degree of falling into the general mass category. Their average bets, playing time and number of visits will still generally be higher than the mass.
4. Mass. It is widely agreed that the mass segment will show the strongest resilience and growth this year. This is due to expanded room capacity for the overnight market, new and more diverse non-gaming attractions which will still send players to the tables. Our contention is that LVS will likewise be the major beneficiary of a more durable mass market than anyone else in the jurisdiction.
Total GGR 2016 is a plus for LVS
Our general forecast has been that total 2016 GGR could come in anywhere between $31 billion and $35 billion. Standard consensus thus far is lower, with some analysts looking anywhere between $28 billion and $29 billion due to a range of anywhere between a total -10% to the -6% last week called by Macquarie. Frankly, it's anyone's educated guess at this time. But one thing most observers agree is that the drastic downdraft of 2015 30%+ monthly declines from 2014 are past us, failing more government bombshells. No one can forecast the mindset of the Chinese leadership as they muddle their way through the changing rapids of their own and the global economy this year. They're Fed watching with the rest of us.
There are already March GGR forecasts floating around financial sites that run the gamut from -14% to -8%. Our latest word is that March daily win appears to be a bit better than expected due to a combination of hold percentage and sustaining mass activity. Short-term calls like this do not a trend make in our view. We continue to believe the key factor here is the bottoming of yoy declines in three stages: 1) From minus double-digit figures each month narrowing as we saw last year, 2) flat yoy comps, which I expect by late Spring on a sustained basis, and finally 3) an upside yoy trend beginning in late Q2.
Las Vegas Sands in our view will be the major beneficiary in the changes explored here to the total size, market segment competition and increased capacity in Macau. Its share of market will spike as a result of that. Given its efficient operating margins, debt leverage slowing and improved EBITDA from late this year through 2017, I think it's a $75 stock.
LVS now sits at $54. I think there is solid evidence in my view to support a 30% or more upside going forward.
Author's note: Howard Jay Klein is a 25+ year c-level veteran of the casino industry and is currently a consultant in that sector. He is the author of Mastering the Art of Casino Management and the publisher of the SA marketplace site The House Edge. To avoid possible conflicts of interest with his consulting business, all his holdings of gaming shares reside in a blind trust for his children and grandchildren.
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.