"The key to winning is poise under stress…"
Paul Brown, father of the NFL
Of all the mournful mantras one hears from investors which stands out as the penultimate comment on opportunities missed is our good old friend, Shoulda, coulda, woulda.
It is a classic expression rooted in the gut hesitancy to pull the buy or sell trigger against conventional wisdom more often than any of us would wish to confess. We like to hide behind commonly accepted metrics that either egg us on or warn us about stocks. Nothing wrong with that if you blend those numbers with what your own best instincts, educated appraisals and sense of timing and impels you to act.
What it all comes down to is that deep dive into the numbers we take, looking for that tiny shinning nugget of information that screams out: Hey, take a look at this. It sometimes appears that nobody else is watching, and the stock is cheap or conversely overpriced. So you either pull the trigger or merely scratch your chin and decide to wait it out. Or perhaps you even take a shot on a put or call position. Mostly your decisions need to be propped up by consensus of some kind.
However not all unlocked nuggets lie semi-buried in the sands as we shake our pans in the stream like old time prospectors during the California gold rush in 1849.
Sometimes a big fat nugget just sits there, staring at us, calling out, "Hey stupid, make your move-I'm a bargain."
Yet unless your confidence is buoyed by some mandarin bank analysis you'll keep your wallet closed.
This is precisely the case that appeared to me as the most stupefying example of a " Hey Stupid stock" gleaming in the sun as the market took a periodic look, shrugged and kept on walking.
That stock is Las Vegas Sands (NYSE: LVS). Now as we're just a month or so away from the projected opening of its spectacular new Parisian property at Macau's Cotai I'm calling out another bargain alert well in advance of the first metrics we'll get to see in early October. We'll have 3 weeks of GGR results to indicate two things: the absorption of capacity on Wynn Palace, due to open in about two weeks, and the subsequent 3 weeks of early results both in gaming and total REVPAR first blush from LVS. They of themselves won't tell a tale. But the following 90 days will. And if that tale suggests that a) Macau GGR has in fact continued to stabilize and b) Macau has in fact comfortably absorbed the two new properties, we'll have a coulda, shoulda, woulda situation on our hands for many investors still sitting on the sidelines as LVS has revved up and moved smartly past its current range.
Last month the yoy decline in Macau GGR had fallen to 4.5%, the lowest since the crackdown. LVS' Q2 earnings release reported the first upside in its mass business in 24 months during Q2.
We made a long term call on LVS with a $70 target going way back into early 2015. There was just too much to like about the company to run away as the Macau crackdown battered sentiment with worse news every week.
Let's just look at January 13 2015. That day LVS closed at $36.97. And it was a trade admittedly hard to gainsay. The Macau gaming sector was getting blitzed daily by sagging GGR numbers, government crackdowns and scoldings got louder. There were junket operator scandals, smoking ban noise and creeping paranoia among VIP players running for cover from the artillery shells hurled at them by officialdom that drained away revenues. Yet as I cautioned then, and stress here, the fundamental power of LVS would ultimately withstand the barrages, absorb the punishment fiscally and begin returning to a much more sensible valuation. And that valuation is where I believed the opportunity to jump in at what was a market blind to fundamentals. The company is a prime example of corporate poise standing up under existential market pressures.
Those were the days when yoy GGR was dropping in the 30% range each month, though slightly narrowing in the process. As the biggest guy on the block, able to house more VIP players than anyone else, it naturally took a disproportionate hit in that area. Yet at the same time it led in mass play and that segment, while also pointing south, was performing relatively better and still is.
Legitimate questions were raised each month as GGR sank to new lows. Those questions hit at the very heart of the premise that Macau could indeed hold its position as the globe's biggest gaming market. I even recall analysts predicting a massive exodus of all play, VIP, premium mass and mass, to other Asian gaming jurisdictions. And some of that had occurred. But in the main, Macau held fast to its core business. And monthly declines began to narrow at a faster pace. LVS continued to operate with improved margins and holding its own against the tide of the GGR downdraft.
My own long-term target on LVS stayed, and continues to stay at $70. That number is based on what I see as the solid tent pegs of the company that are certain to keep it stable and growing in the months ahead against diminishing headwinds. That price I believe could be reached any time between Q4 and Q2 2017 and here's why:
1. Long term visitation trends. Morningstar recently forecast it saw annual Macau visitation reaching 45.6 million by 2025 up from 33.7 million in 2015. My own calculations colored by my on the ground industry sources there believe that number could be short between 2.3 and 2.8 million, most of which they believe will come from a growing spread of visitation from nearby Asia countries.
Whichever number you like bodes well for LVS as the largest single operator of rooms in the jurisdiction with 12.700 total after the Parisian opens. Some analysts are getting skittish about hotel room rate wars as new capacity comes on stream against a continuing, albeit sharply narrowing, yoy GGR trend. In the case of LVS it's what I call in Orwellian 1984speak as illogical logic. Of course supply and demand laws are rarely broken in the real world. Rates will go to war. However sitting with its huge capacity, LVS has the ability to spread its discounting over a so much larger universe that while REVPAR might take a hit, occupancy will compensate for a good deal, if not all of it. Yes, less REVPAR but also more total rooms and more total heads on beds adds and more occupied gaming positions, more shopping, more dining, more conventioneers accommodated.
(Speaking of heads on beds, we are advised by our sources that Wynn Palace (NASDAQ:WYNN) is over 75% booked for the opening and VIP credit is running very strong).
Bear in mind LVS's core business model is the integrated, convention oriented gaming resort offering something for everybody. It LVS's case it's the MICE that catches the cats, if you'll pardon the pun. (Meetings, Incentives, Conventions, Exhibitions) and LVS has the biggest, hungriest herd of cats in the business to bring to the battle of Macau.
But beyond Wynn Palace and the Parisian, only Genting's World Resorts is due to come on line in 2018 and after that none. So it's a fair bet that the Macau you'll see in 2018 in terms of capacity against a growing visitation number is the Macau that will be fixed for the foreseeable future. That kind of gaming position to population to visitation ratio sounds to us like LVS has a future trade well above its $52 a share range today. And that future can show up in the trading range very shortly as LVS nears its 52-week high.
2. The trend will be driven by the infrastructure improvements coming on line between now and 2025. LVS's Chairman Adelson has alluded to these (as has Morningstar more recently) during many earnings calls. They include the opening of light rail transit, the Pac On Ferry Terminal, Lotus checkpoint improvements and reclaimed land initiatives, which will materially improve traffic conditions.
3. The Parisian. I have talked with industry colleagues active in the Macau market with whom I have shared pre-opening and opening management challenges, hopes, dreams and uncertainties over many years. To a person they report to me that Parisian definitely falls into the "must see" category, one veteran marketing person saying, "and It's like the Mirage all over again in 1990. You take Steve's place in two weeks and then Parisian and you'll have two game changing properties generating mass visitation to the Cotai Strip. Eventually as the novelty begins to wear off, it becomes a capacity game. In that play LVS wins big."
The barriers to entry due to the Chinese government's policies will remain high.
There is of course always the prospect of a revenue envy government takeover long term. At this point that seems to be a tepid argument against a bearish outlook on the shares now. Legally nothing can happen until 2020 anyway. So here's your bet: With growing visitation driven by improved infrastructure and capacity that will in effect freeze solid through the end of 2018 when Genting debuts, are we really talking here about a $52 stock or is a $70 stock staring us in the face, waving a green flag, calling out, hey, look at me now?
4. Operating Margins.
Throughout the entire Macau downdraft including the most recent Q2 16 numbers, LVS leads Macau in margins at 33%. It remains a nimble, well-oiled machine that produces more return per dollar of revenue than anyone else. More capacity will further enable them to continue spreading fixed costs over a larger universe of revenue and their ability to sustain that margin leadership means earnings will be rapidly moving north from here on in.
Add Singapore's strong performance (normalized for currency and hold percentage gyrations which aren't permanent) and you have a revenue balance in Asia not shared by any other US based casino operator.
4. Las Vegas & Bethlehem: LVS US market outlook
The story in Las Vegas is essentially the same: gaming slightly soft to stable, non-gaming growing at a healthy pace. Oversupply threat: Put that low down on the list. Vegas has two new kids on the block to deal with, both together represent around a 1% increase in capacity. Wynn's Paradise Park outdoor lagoon property---a great game changer will work for everyone. It will only add about 1,000 rooms at present estimate to the Vegas total by late 2017. After that Genting's Asian themed property will arrive in 2018. Other than these two no major properties are expected to open. Vegas visitation continues to recover from 2009 lows with 43 million visitors expected this year. LVS properties, the Venetian and the Sands Convention Center can be expected to sustain their current contributions to total corporate EBITDA and in fact, outperform them, if and when the economy rises from its current crab like sideways crawl.
5. Dividend history. As we have often pointed out, the commitment to dividends for LVS is almost a visceral commitment for CEO Adelson and his management. Given the company's current debt coverage numbers, its operating margins, the prospects of the Parisian, it would appear to us that the current dividend history trend will continue:
2016: 2.88 (est.)
Yield 5.65% and fairly certain to climb going forward in 2017.
Annual Revenues: $11.690b billion
So let's summarize free of the cobwebbed metrics that have dogged Macau over the last 20 months.
In LVS you have a company doing nearly $12 billion in annual revenues, operating at a 33% margin, with a proven business model of a modern, integrated casino resorts in strong markets, healthy debt service coverage, highly focused, savvy management proven through the Macau maelstrom selling at $52 a share.
Compare that with Churchill Downs, Inc. (NASDAQ:CHDN) a fine company whose shares currently trade at $144. Its annual revenues are around $1 billion over 65% of which comes out of legacy, slow or no growth racing or US regional gaming. I've been accused of picking on this company before, having written several times that I feel it is wildly overpriced, overvalued, over cherished if you will by its big coterie of institutional investors.
That's an unfair characterization. As I have repeatedly stated, Churchill is indeed a good company, well managed with a nice asset portfolio. But I invite commenter to elucidate me on why the market values it as $144 a share against LVS at $52? My suspicion is that all of the juice behind the trade is focused on Churchill's Big Fish division of online social gaming-a sold entry in the space. And that its large chunk institutional holders have convinced themselves that Big Fish has an enormous upside because they find themselves beguiled by anything on line. The fact is that as good as Big Fish is, and it is good, it faces growing competition, particularly from Asia, where all the online social and live gaming growth is coming from in the sector. Most recently Caesars Acquisitions (NASDAQ:CACQ) got a huge premium paying (over $4 billion for its online business) to be acquired by a China's Giant companies, who see it as a great foothold into the US market. So there's the sex appeal-that's fine. But please explain going forward with a straight face how you see Churchill worth more $92 a share more than LVS with an asset base only 10% of LVS?
Always willing to be educated but LVS is still sitting there at $52 with a solid story for anyone willing to really listen.
About the author: Howard Jay Klein is a 25+ year c-level executive of the casino industry now a consultant to that sector. He is the author of Master the Art of Casino Management and the publisher of the marketplace site The House Edge on Seeking Alpha. His own gaming portfolio is in a blind family trust so as to avoid conflict of interest possibilities with past, present and future 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.