Las Vegas Sands: Disappointing Earnings, But Long-Term Potential

Expectations were relatively low for Las Vegas Sands (LVS) as the list of worries was long because of the forecast of potentially lower margins, higher costs due to the opening of new casinos and concerns over increased competition, a saturated Macao market place and fears that consumer spending would hurt gaming revenues. Those factors had previously contributed to the downturn in the share price, and so the anticipation helped cushion the blow for the fourth quarter, although the Feb. 4 earnings' report was still quite poor.

The company's net income dropped to $39.9 million, or $0.11 per share, from $113.6 million, or $0.32 per share, a year earlier on revenue that increased 64.8% to $1.05 billion compared to $636.6 million in the previous year. The adjusted profit of $0.20 per share along with the revenue number widely missed the consensus estimate of earnings per share of $O.35 on $1.11 billion.

After breaking it down by segment, the results were not good. Las Vegas casino revenues decreased 24.6% to $116.1 million in the fourth quarter of 2007, compared to $154.0 million a year ago, though results did not include the Palazzo. In terms of Macao, the Sands Macao showed fourth quarter casino revenues decreasing 17.6% to $282.8 million versus $343.3 million in the 2006 period, suggesting some cannibalization from the Venetian Macao, which in its first full quarter of operation, saw revenues of $418.3 million.

The reaction was surprisingly positive from some in the investment community. Instead of taking a more cautious posture, Morgan Stanley analyst Celeste Brown stood by the company with a $117 price target, and in a research note said that "now is the time to step in" despite the earnings miss because of the company's long-term growth potential. But it is important to remember that this is the second consecutive miss for Las Vegas Sands.

In November, the company posted a wider than expected loss of $48.5 million, or a loss of $0.27 per share, and also fell short of analyst expectations on revenue of $694.3 million. The optimism appears to be driven by projected future expansion in Macao and the Cotai Strip, along with a new casino in Singapore. However, the valuation is just too expensive even when considering the growth potential which still looks to be unpredictable because of the lack of guidance and lack of earnings consistency.

The Las Vegas Sands still needs to prove itself to the market place. As a result, shares will probably continue to trade in the current range of between $80 and the low $90's.