By Howard Jay Klein
"Trees that are slow to grow, bear the best fruit…"
Let's begin here. I'm long on record on SA as guiding Las Vegas Sands (NYSE: LVS) to the $70 to $75 range by the end of Q2 or Q3 this year. I don't intend to hide from that appraisal based on the big Q1 earnings miss yesterday. That number was based on my take of the stock and the company as a long-term call on its solid fundamentals. To me, it wasn't a matter of if LVS would ever reach that trading range, just when. In all my SA calls on the stock, I further acknowledged that Macau was not out of the woods. And that recovery would be a long, inch-by-inch process. So far, that's just what has happened. But markets are impatient athletes; they tend to be knee-jerk responders, not smooth distance runners.
As a result of yesterday's earnings call, LVS, which had traded up to around $52 prior to the release, has fallen to $46.53 - over a 10% drop, as if this writing. It's an understandable knee-jerk decline I'm surmising, mostly triggered by holders who clearly expected evidence of a stronger Macau rebound, some short money, and profit-taking for those nervous types who may have bought in at or near 52-week lows. Totally understandable if it shakes up some investors, of course.
All gaming stocks have been pulled south on the news, also to be expected. It may be evidence of the wisdom of markets - a widely believed nostrum. Fine, fair is fair; markets can be wise at times. LVS' Q1 results can give those inclined to jitters, well, more jitters. I accept that. But I'm sticking to my long-term bullish call anyway.
Less recognized is the simultaneous foolishness of markets factor. It tends to accompany certain industry sectors more than others. Gaming is one of them. In yesterday's earnings call, LVS CEO Sheldon Adelson alluded to the disappointment of some analysts back in Macau's golden, early 2004 days. "When growth was only 50% - they were disappointed because they expected 70%," he reminded analysts. It's a reaction something akin to a person lighting a match in a darkened theater to look for a smartphone that may have slipped out of his pocket and someone else yelling "fire!", prompting a panicked run for the exits.
Haven't we seen the stock market knee-jerking that way for decades? Haven't we witnessed fortunes made by investors not intimidated by cyclical downturns? Stock pickers who've held on through storms and longer term, becoming wealthy in the process?
Who hasn't heard lamentations like this, which I listened to just last night:
"When Google came public in that crazy auction deal, I was wary about bidding in the high 80s. I bought in, grabbed a few points and ran like hell when I read an analyst report. It said that a Microsoft search engine breakthrough would kill the stock on the way up. Had I held on, I'd now be sitting on a $752 stock. I was an idiot."
The "idiot" was an old industry friend, who by the way, is far from an idiot. We'd gotten together for dinner to discuss a consulting project. It was after the gloomy Q1 LVS news broke. He's a long-time investor in the stock, having made lots of money along the way and pocketed stacks of dividend checks.
"I'm sitting in the high $50s but I'm not getting nervous. Should I be?" he asked.
It's not my place to tell anyone if they should or should not be nervous over the bad Q1 LVS results. That quite naturally is a decision investors need to make for themselves based on their risk tolerance, their own appraisal of the numbers and of course, their gut sense of what's best for them. Yet I will add my vote of confidence on the shares to many others now weighing in both positive and negative. I hope it will bring some sense of industry perspective to the ongoing discussion.
In my view, if you now hold LVS, stay put. Short term, you'll continue to receive Sheldon Adelson's largess of $2.88 per share in annual dividends this year. The CEO has also restated his intention to continue stock repurchases if and when the timing is felicitous. Long term you will see, without a doubt in my mind, a robust appreciation of the stock that will bring it into a valuation that won't evoke any coulda, shoulda, woulda lamentations.
If you don't hold LVS now and are considering buying into the current Q1 evoked dive in the mid-$40s, by all means, it's a great entry point. In the past, I've guided the stock at much higher entry points believing as I still do, that based on its assets, free cash flows, cost management savvy, and long-term Macau market potential, it's a buy. In my view, now short-term trading jitters have made it an even better buy. If you bought in at a higher price, don't worry, unless you're a trader. This is a stock for long-term holders, period.
In the industry, we have an expression when some antsy casino managements, observing a hot run of luck by big players tend to "sweat the games." In other words, they worry about losing entire shifts and convey that stress to players, even though they know in the longer run things will realign to the long-term house edge. And that evokes another expression. There are shifts, days, weeks, months and quarters in a gaming establishment when as we say, "the rats eat the cats." Unless you are psychologically cool with that reality or empty seats at the blackjack tables, you shouldn't be in LVS. (By the way, due to a bad hold PC in the period at their properties, the company booked $125 million less in win. So much for hallowed Wall Street metrics).
Don't worry, in time, the cats will be at it again.
In my opinion, there are probably 15 reasons for a bullish outlook on this company. But I thought it wiser not to try your reading time by boiling down the five most trenchant rationales as to why I continue to be a fan of the company despite the Q1 miss. (Note: On another well known guru financial website last week, an earnings beat was forecast. Such is the tyranny of metric navel contemplation and forecasting).
1. Company-wide hold normalized EBITDA reached $1.03 billion, beating 2015. Remember Macau Q1 2015 had a decent January but fell out of bed in February with the junket crackdown (-48% YoY 2014) followed by a bad March. Fair to say, Q1 2015 was a shaky comp, but common sense context tells us this story: Out of 4 casino hotels for Q1, LVS pumped out revenue tracking to exceed the entire gaming revenue of the 165,000 room Las Vegas Strip by the end of Q4 2016. Conclusion: Asia is a great place to be for gaming companies that know what they're doing. LVS revenue per day grew 5% in mass, 5% in premium mass, 6% in base mass, 2% in slots. All in a terrible macro environment.
2. Earnings of $0.45 were a big miss by 17c against revenue of $2.72 billion, down 9.6%, or $160 million. Yet the company experienced the first sequential increase in mass GGR since Q1 2014. On a daily basis, LVS properties were up 10% in mass. During Chinese New Year, LVS hotel occupancy was 98%. Visitation patterns emerging, according to our sources there, are that weekends and holidays are getting stronger, midweeks are thinning out, but smart management on room rates can help average out good RevPARs. No surprises there.
Conclusion: Once LVS Parisian opens, LVS will command 15,000 total rooms in Macau. Its diverse shopping, meeting and convention dominance will continue entirely due to its capacity and machine marketing to those MICE segments.
3. LVS Singapore: Hold normalized EBITDA was up 10% vs. 2015.
Mass win per day improved by 10% to reach a Q1 record measured in Singapore dollars. EBITDA increased by 68% from 2015. The downdraft in Singapore was almost entirely related to currency fluctuations, but overall performance was pretty solid. Why?
Common sense conclusion: Visitation from China was 34% up, and not because of junket crackdown escapees. Singapore is just as tough on money laundering. The market performed well, period.
4. Cost management. This is an area where year after year LVS manages well, no matter the disruptive and damaging forces of the marketplace, and they are plenty. In 2015, LVS produced an annualized cost reduction of $250 million, with even more slated for 2016. Operating margins reached 32%, up 2% YoY. An additional $200 million in cost savings is targeted for 2017 after the Parisian opens.
5. The Parisian. Without a doubt, the Cotai development of both LVS Parisian and with it, Wynn Palace, (NASDAQ: WYNN) will trigger increases in visitation from not only established feeder markets like Hong Kong and Mainland China, but from all over Asia. The issue of dilution always arises in gaming when new properties appear in slackening gaming market conditions. There is no denying that factor is real. Link that to what is clearly a slowing macroeconomic picture in China and you have two ingredients that would seem to contradict the very rosy predictions by Adelson and his key people of having built a huge winner in Parisian. You have to take that optimism on faith from a company that has been in the Asian market for over 12 years. But if you don't, consider the following, explained below.
The population card: The reliable Ace in the hole
Let's play the population card here. We know that many LVS skeptics see use of such numbers as hiding from the cold realities of the current downdraft. We accept that as a legitimate part of the conversation about the stock. But guys let's be real. Let's think like developers, not holders of digits that represent shares of stock. Conclusion: There are 1.3 billion souls in China, a people with a long cultural tradition that realistically sees gaming as a core form of recreation. Expose a chunk of them to spectacular properties with diverse amenities such as the Parisian or Wynn Palace and they will arrive, if only to gawk, throw a few coins in the slots and have a meal. Put another way, Macau visitation, even during last year's miserable siege, still produced 31.7 million visitors, down 2.6% from the previous year. So the common sense question we pose as gaming people is this: Can powerful marketing efforts by LVS and its competitors to reach deeper into more Chinese provinces against somewhat loosened tourist number restrictions and produce revenue? Whoever replies no is just, in the words of LVS COO Rob Goldstein, "being silly."
Just from the perspective of simple human curiosity and need for diversion, the new Cotai properties will deliver lots of new bodies. There will be temporary dilution quite naturally. There always is. Gaming is cyclical, as we've alluded to before in other articles. There are factors like bankroll fatigue, macro economics and plain burn out that always have and will continue to keep the business cyclical. Yet in the end, lost bodies are always replaced, and new bodies arrive.
It should be pointed out, gaming is not a business pioneered by Bugsy Siegel in 1946 Las Vegas. In many ways, it's the world's first oldest profession. Archaeologists have unearthed dice and gaming wheels on digs dating to 5,000 years ago. And that's where the mammoth population pool of Asia simply cannot be denied as being a central engine for a healthy gaming industry.
Howard Jay Klein is a twenty-five year plus c-level veteran of the casino industry and a consultant. He is the author of Mastering the Art of Casino Management and publisher of The House Edge premium site on Seeking Alpha. All his gaming stocks are held in a blind trust for his children and grandchildren so as to avoid potential conflicts of interest with consulting assignments.
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.