Is Las Vegas Sands Still a Gamble?

As the market gets pushed lower in the challenging 2008 environment, it is natural to begin to look for bargains on quality stocks that are trading at much lower prices. I have herd respected opinions begin to call for a rebound in Las Vegas Sands (LVS) and there are some that believe this story will result in long-term value for shareholder. If such value is truly in this name which now sits at a discount of more than 40% from its recent high, then it would make sense to buy at todays prices. But I am concerned that such bullish statements do not take into account the incredible leverage and subsequent risk in the stock at this time.

LVS has been a Wall Street success story with its late 2004 IPO pricing at $29 above the proposed range. The stock closed its first day of trading at $46.56 for more than a 60% gain. While it took some time for the story to get out and the momentum to pick up, the investing public became intrigued with the potential for broad expansion as LVS brought the gambling and casino resort industry to China. With near exclusive rights to begin building in Macau, it appeared that the company would be able to mint money but setting up extremely profitable properties and enjoying healthy traffic rates with a heavily spending public. While this fundamental assumption appears to be correct, the stock more than accounted for the potential growth, rising to a high of nearly $150 in October of 2008. This is compared to published estimates of $1.04 EPS in 2007 and $2.33 in 2008.

Bulls argued that the price properly accounted for the absolutely incredible earnings potential once the new properties were completed and the full revenue stream was brought online. However, as the company began to hint that building projects were sometimes delayed, and capital expenditures were higher than previously projected, Wall Street began wising up and marking down the price of this high growth name. The view is that while revenues will still come in as expected, investors are not being compensated as quickly as they expected and so the premium that new buyers were willing to pay for future earnings was cut back. The third quarter earnings report was especially troubling to investors because margins on existing properties were lower than expected, while at the same time, capital expenditures for new projects was ratcheted higher which increases the cost to carry these properties until the revenue begins to flow.

Some investors have voiced concern that a second property opened by LVS in Macau will cannibalize sales at its existing facility. Management indicated that at first blush, it did not appear that the opening in the third quarter had any negative effect on the existing property. But it will take more than just one quarter’s numbers which include a grand opening publicity event to properly judge whether the dual properties truly create synergies. On the expense side, management stated that they were unhappy with the performance so far on combining overhead expenses to improve margins. This may be indicative of a management team that is overloaded with many different projects and unable to truly focus and execute well on individual initiatives.

The balance sheet is somewhat concerning as the company is now in debt to the tune of $7.29 billion. While the founder has had no trouble securing financing up to this point, it may become more difficult to finance growth as these properties are very expensive undertakings. If investors are concerned that the current results may hamper growth, you can bet lending partners will be taking a closer look at how much risk they are willing to take by loaning additional funds. The company has $1.94 billion in cash which should help with near-term plans, but with Capital Expenditures of $1.03 billion in the third quarter alone, it is troubling to see how fast the cash can be burned through.

So while the price of the stock has dropped considerably and will likely bounce with a stabilizing overall market, I would use any strength to lighten up on positions and potentially short the stock instead of playing it from the long side. I am not calling into doubt whether the company will make money in the future, but more pointing out that the current premium in the shares points to significant growth in the future which may be overstated. At the very least, I believe investors are not fully aware of the risk involved in owning this highly leveraged name.