In my hit piece here, I highlighted Las Vegas Sands' (LVS) impressive fundamentals. From catalysts in Macau to continued international expansional, LVS has one of the most compelling growth stories in the market today. Ditto for Wynn Resorts (WYNN) and smaller players Caribbean Casino & Gaming (CGAQ.PK) and Global Casinos (GBCS.PK).
In this article, I will now run you through my DCF analysis on LVS and then triangulate the result with an exit multiple calculation and a review of the fundamentals compared to MGM Resorts (MGM) and Wynn to increase confidence in the case for LVS.
First, let's begin with an assumption about revenues. LVS ended FY2011 with $9.4B in revenue, which represented a 37.3% gain off of the preceding year. Analysts model around a 27% per annum growth rate over the next five years. To account for cyclicality, I personally model the growth rate dipping from 36.2% in 2012 to 15.2% in 2014 and then rising to 130% in 2017.
Moving onto the cost-side of the equation, there are several items to address: operating expenses, taxes, and capital expenditures. I model that cost of goods will eat 55% of revenue over the next few years compared to 16% for SG&A and 0.1% for R&D. SG&A has fallen from 20.8% to 13.6% over the last three years while COGS has fallen from 63.1% to 52.3%. Thus, my figures conservatively assume a halt to the trend and normalization around the lower-end. Capex, which precipitously fell from 11.9% to 2%, is estimated the same way at 5% of revenue. Taxes have averaged 11% over the last two years, but I account for a drastic increase to 25% to play it safe again.
We then need to subtract out net increases in working capital: we model accounts receivables as 2.7% of revenue; inventories as 2% of COGS; prepaid expenses as 2.7% of SG&A; accounts payable as 3.5% of OPEX; and accrued expenses as 23% of SG&A.
Taking a perpetual growth rate of 1.5% and discounting backwards by a WACC of 10% yields a conservative fair value figure of $68.04, implying 28.2% upside. This is on top of a 1.9% dividend yield.
All of this falls under the context of strong operating results:
"Now let me get back to a topic a little closer to my heart, and that is EBITDA. Our 2011 company-wide EBITDA soared from $2.2 billion in 2010 to an industry record, an all-time industry record of $3.53 billion last year, a remarkable 58% increase. In addition, earnings per diluted share in 2011 increased a whopping 106% over the previous quarter. These over -- sorry, that should be year instead of quarter. Earnings per diluted share in 2011 increased a whopping 106% over the previous year. These overall results also reflect another substantial accomplishment.
In another industry first, we had 2 properties in 2 different markets, Marina Bay Sands in Singapore and The Venetian Macao in Macau, that both produced EBITDA in excess of $1 billion. In fact, every single one of our properties saw meaningful percentage increases in EBITDA in 2011 compared to 2010. This past year truly showed the power of our Integrated Resort business model and its ability to generate tremendous revenue, but of course, EBITDA".
From a multiples perspective, LVS appears to be expensive as it trades at a respective 34x and 17.4x past and forward earnings versus 24.5x and 17.6x for Wynn. However, assuming a multiple of 22x and a conservative 2013 EPS of $3.01, the rough intrinsic value of LVS' stock is $66.22.
Consensus estimates for Wynn's EPS forecast that it will grow by 5.6% to $5.89 in 2012 and then by 15.1% and 13.7% more in the following two years. Assuming a multiple of 22x and a conservative 2013 EPS of $6.64, the rough intrinsic value of its stock is $146.08, implying 22.4%. In light of how MGM is bleeding millions upon millions, LVS and Wynn are competitively well positioned to gain share. MGM is more exposed to Las Vegas than what the market may acknowledge while returns in Macau are likely to decelerate. LVS, however, has had solid returns on the Strip and was able to showcase its brand appeal by improving prices. In conclusion, I strongly recommend investing in LVS and Wynn.
Additional disclosure: We seek to provide investor relations services for all of the firms in our coverage, but research covered in this note is independent and for prospective clients. The distributor of this research report, Gould Partners, manages Takeover Analyst and is not a licensed investment adviser or broker dealer. Investors are cautioned to perform their own due diligence.