"During winter, you head out into the darkness for a run when spring comes and the first crocus pokes up its head you know it was worthwhile…"
Nina Kuscik, first woman to win the Boston Marathon (in 1972)
After yesterday's earnings call by Las Vegas Sands (NYSE: LVS), the stock inched up to $50.05, up 2.24% despite an earnings miss of $0.04 per share, and lots of minuses laced through the Q2 operating numbers. You can expect LVS to wiggle around this number up or down a half point or so, as the market absorbs the full implications of the company's performance in a marketplace still facing powerful headwinds going forward.
Yet, despite the gloomster view still emanating from many Macau observers - not without some reason for certain - there remains little question in our minds that Macau has seen the worst, is coping with a new normal, and that stabilization has arrived. The blooming roses may be a few quarters down the road, but nature is telling us to expect balmier financial weather for Macau.
And there are numerous crocuses to be found sifting through the welter of LVS's Q2 numbers, in actuality, too many to blow off as no indication that better days really do lie ahead.
Let's look at a few numbers
LVS's net revenue for Q2 was $2.65 billion vs. $2.92 billion in 2015. Not maypole dancing time for sure. Nor are we suggesting that it is. But let's talk like business people, not business school theorists. The yoy decline was 9.3%, nearly all of which was attributable to the continuing, but clearly slowing decline of Macau GGR. In his remarks to shareholders, Adelson noted that LVS's mass revenue for June showed the first increase in 24 months.
Non-rolling chip drop at the Venetian Macau was down 1.2%, essentially flat. That number reflects mass table games activity from a drop of $1.672 b in 2015 to $1.957.4 b in 2016. Conclusion: The property is holding on to its mass table games business base despite lots of continuing headwinds.
Now, let's look at slots: 2016 slot handle was $979.3 million vs. $973.2 million, an increase of +0.06. Again, it's no garden of roses, just another irrefutable crocus that tells us that the LVS mass business is holding its own and beginning what we believe will be a slow but steady creep northward by Q3.
These numbers, I often remind gloomsters, are not merely digits. They represent bodies at tables, bodies at machines, bodies that have not been scared away by existential forces lo these many months in which Macau has been suffering. They're still coming, they're still gambling.
And, by the way, they're still staying. Occupancy at the Venetian, for example, barely budged yoy from 82.1% to 81%, a decline of 1.2 points, which can be attributed to dozens of factors: convention no-shows, and thinner midweeks balanced by fatter weekends.
We also note:
1. For Macau, hold-normalized EBITDA reached $954 million with margins expanding 160 bps and yoy 120 bps. Non-gaming continued to produce a hefty 33% margins.
2. LVS announced it would pay a $0.72 dividend per share, an increase of 10.8% and a like amount for Q3.
3. In Las Vegas, LVS's two properties produced a 6.5% yoy increase in RevPAR to $228 and slot win was also up.
4. Sands Bethlehem spurred by a healthy hold percentage of 18.6%, a 1.4% yoy increase against a slight increase in total drop. EBITDA for the property was up 10.4% to $37.7 million. It is fair to state here that the outstanding performance of this LVS property will be tested at some time going forward if New Jersey voters approve a referendum this November to authorize two new casinos at the north Jersey Meadowlands. This could have a major downside impact on Sands Bethlehem - but that's either not going to happen, or if it does, its impact won't be felt for at least two to three years. Meanwhile, propelled by a powerful marketing engine in the metro New York Chinatown, this property is killing it and making a solid contribution to the many factors in the company that are partially offsetting the Macau decline.
5. LVS's balance sheet remains strong with $2.23 billion in cash against $10.27 billion in debt with more than adequate interest coverage going forward. Q2 capex was $362.6 million, nearly all of which was attributable to the Parisian development, construction, etc. Pre-opening expenses for the Parisian were $31.5 million, well within budgeted guidelines.
6. Parisian. Gloomsters tell us that the arrival of Parisian and Wynn Palace (NASDAQ:WYNN) at the Cotai will balloon supply in a soft market and presage yet another disaster. There will be dilution, but as has been the case in gaming for decades, it will have a distinct pattern of high initial curiosity visitation, followed by a shakeout of customer action sharing, followed by a return to a level of play that will tend to cluster higher-end mass and premium mass at Cotai and general mass at current locations. And eventually the pull of demand will reorient itself and the general market will expand.
7. Managing room blocks is one of the supreme tests of skills of casino management. It involves both instinct and mastery of numbers and customer knowledge. You have your VIP base, your city-wide rate comparisons, your reservation book, your estimate of no-shows, your measurement of the draw of given shows and other attractions, and against all this, you must make the best possible call that results in the highest possible RevPAR number you can extract from a given day, week or month. You need to be fast on your feet to move rapidly as trends don't always show easily. You never want to go down with rooms. Over time, LVS's management has proven among the best at managing room inventory to the max. That's one reason its operating margins are better than most competitors. That will continue as Parisian opens and gains momentum.
The Macau Distortion: A phenomenon of bearish outlooks that is terribly dated
Guilty: Just as many Macau bears have cherry-picked the continuing outpouring of negative numbers to support their contention that the marketplace is still speeding toward the global dumpster, we've picked over the LVS earnings to do some cherry picking of our own. It's just all in the name of bringing balance to the minds of readers who can too easily assume that some bearish observers have superior access to trends and information that they don't. You heard it here first: Trust me, they don't. I have my sources, they have theirs, we all hopefully contribute to as balanced a picture as we can paint of the realities facing the future of Macau-heavy shares.
One of the problems I see is the tendency of many bearish commenters to use pre-crackdown and early post-crackdown GGR numbers as a standard for judging what will happen in Macau in the immediate and intermediate term. That in my view puts a basic distortion into such prognostications.
Let's be brutally frank. The halcyon days of Macau from the early 2000s to the nuclear blast of the junket crackdown in February of 2015 were in themselves reflecting a VIP marketplace that was unsustainable over the long haul. It was no secret to anyone inside the industry or observing it up close that a ton of VIP action was coming from people who were doing currency dances of one kind or another from illegal, to grey area to borderline legal.
The capacity of players in that market to find ever more ingenious ways to move money was long part of the far eastern gaming picture. While there was certainly no strong advance indications of a nuclear crackdown on VIP play, it was clear that schemes like the UnionPay card shuffle were bound to get so blatant as to prompt an embarrassed, face-saving counterstroke from the government.
So almost from day one, it's fair to say that at some point 70% of Macau play coming from VIP could not and would not continue. The operators complied with regulations, ran tight and clean ships, and the junket operators to a great degree insulated casinos from much of the credit and currency fun and games. Therefore, to measure the downdraft of Macau against those years' colossal numbers in various analyses since in our view creates an odious comparison.
We need a new historical perspective from history to guide our analysis from here on.
Let's use what world historians have developed over time as their yardsticks. Macau, like history itself, has its BCs and ADs.
BC: GGR VIP numbers and percentages Before Crackdown starting with February 2015 as essentially year one.
AD: After the Deluge. Beginning with Q1 of 2016, assuming that most of 2015 the Macau gaming market was still absorbing the aftermath of the crackdown and accompanying regulatory bombs. It's sort of like the dark ages following the collapse of the Roman Empire and before the ascent from the ashes into medieval times, which in turn, eventually produced the Renaissance.
Taken in this context, we see that a financially-sound, geographically-balanced, well-managed, savvy-operated company like Las Vegas Sands that can produce a Q2 number like $2.65 billion in revenue and a $518.7 in operating income (though down 9.3% from the previous year - the dark ages Q2 of 2015), did pretty well. On top of that, it continues to pay a 72c dividend per quarter, improve operating margins and is preparing this September 13 to open a spectacular new resort - and you have to conclude:
Why are these shares, having inched up recently, still hovering around $47 to $50?
Well, our view is that there's a reason. And that reason is that the prevailing zeitgeist out there is still judging LVS and its best Macau competitors on BC standards.
Look at it this way: If you were a little green Martian named Warren and you just landed on earth to sniff out investment possibilities and knew nothing of Macau's golden wild west era of 70% VIP business and you were shown LVS's Q2 report, without the benefit of BC comparisons, what would you do?
Let it just sit there at $50? Or apply real world appraisal to its value as a going business and tell yourself: Boy too many of these guys in this market are dumb as hell… Charlie, we're buying.
Per our take early this year, we're sticking with our $70 target for LVS anywhere between Q4 '16 and Q2 '17.
About the author: Howard Jay Klein is a 25+-year veteran of the casino industry and a consultant in that sector. He is the author of Mastering the Art of Casino Management and the publisher of The House Edge marketplace site on Seeking Alpha. His own gaming portfolio is managed in a blind trust for his family in order to avoid conflict of interest with clients or potential clients.
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.