What follows is a list of companies specializing in leisure services. Casino operators Las Vegas Sands and MGM attractively capitalize off of the emerging markets, and the latter company represents a high risk turnaround play. Cruise line Carnival, however, has a sizable dividend yield that could attract income investors. Overall, I recommend overall exposure to the leisure market given my optimism about a quicker-than-expected global recovery.
Las Vegas Sands (LVS)
LVS trades at a respective 25.7x and 15.2x past and forward earnings with a dividend yield of 2.1%. To value LVS, I employ a DCF model. In this model, I assume: (1) per annum growth hovering between 36.2% and 20% over six years, (2) operating metrics at historical levels, (3) a 1.5% perpetual growth rate, and (4) a 10% discount rate. Based on these assumptions, I find the fair value to be $68.04 for 40.4% upside.
The stock, however, is highly volatile at a beta of 3.7. While this increases the risk, it also allows for stronger returns. Even still downside is limited due to strong management that has delivered consistent returns. Emerging market penetration further hedges against domestic uncertainty. I rate the stock a "buy".
MGM Resorts (MGM)
Consensus estimates for MGM forecast that losses will decline 19.6% to -$0.45 in 2012 and then by 66.7% more before entering positive territory. Since the company is bleeding money, it remains a highly risky investment. Overall, however, I believe that the risks have been overblown.
The reason why I believe the risks have been overblown is because MGM has demonstrated momentum in its turnaround story. 2011 was successful in terms of growing both revenue and EBITDA by double-digits. Moreover, free cash flow was positive at $374M and even grew by double-digits despite an earnings loss. Instead of "focusing on the bottom line", investors should be "focusing on the free cash flow line". I rate the stock a "speculative buy".
Carnival trades at a respective 15.5x and 13.9x past and forward earnings with a dividend yield of 3.2%. Consensus estimates for Carnival's EPS forecast are that it will decline by 33.5% to $1.61 in 2012 and then grow by 40.4% and 22.6% in the following two years. Assuming a multiple of 16x and a conservative 2013 EPS of $2.22, the stock would hit $35.52 for 11.8% upside.
This top cruise line defended pretty well against a PR nightmare by deflecting attention away from the sinking of the Costa Concordia. From a risk standpoint, the company is attractive in light of its high dividend yield. At the same time, if taxes in dividends rise, it is axiomatic that stock prices will decline, ceteris paribus. Exposure to Europe further adds a layer of under-recognized risk. I rate the stock a "sell" mainly due to my fear about a dividend tax hike.
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