Since the US economy is still struggling, and Las Vegas as a casino gambling destination is not doing any better, investors wonder about the steep decline in share prices casino operators were exposed to over the course of the year. Las Vegas Sands (LVS) has lost about 35% this quarter and 10% over the last 52 weeks. Its competitor, Wynn Resorts (WYNN) has not performed much better: Wynn has lost 38% over the last 52 weeks while MGM is down 33% over the same period. The stocks have been declining over the recent quarter in response to weak employment levels, a sluggish US economy and feared cutbacks in consumer spending which would hurt gambling destination Las Vegas disproportionately. This article should illustrate if either LVS or Wynn is the better deal for investors based on current market expectations.
Wynn is already fairly valued
Wynn Resorts owns and operates two landmark entertainment complexes in Las Vegas, Wynn Las Vegas and Encore at Wynn LV. The company is a S&P 500 constituent and has a market capitalization of $10 billion.
Wynn has a current P/E of 15.7 and a PEG ratio of 1.42. Given that Las Vegas continues to work through a cyclical low, I consider this to a be a rich multiple for a highly cyclical firm that is dependent on high spending levels. Even a dividend of 2% and high projected earnings growth of 12.1% annually over the next 5 years do not convince me to rate Wynn a BUY.
Why to prefer Las Vegas Sands
Las Vegas Sands (LVS) is a US-listed company which develops, owns and operates casino resorts in the United States, Singapore and Macau. The company has a market capitalization of $33 billion and revenues of $10 billion.
International expansion and diversification
The property portfolio of LVS is more attractive than Wynn's: Prime casino locations such as The Venetian and The Palazzo in Las Vegas, Sands Macao and Venitian Macao in China, as well as Marina Bay Sands in Singapore are located at the heart of these gaming destinations. Having a geographically diversified portfolio with assets located in Asia, helps mitigating concentration risks that come with Las Vegas Sands' heavy Las Vegas dependency.
LVS is ideally positioned to profit from an increase in global consumer spending and gaming expenditures. This growth in expenditures is be reflected in LVS' EPS expectations which are superior to Wynn's: Analysts that follow Las Vegas Sands are expecting it to grow earnings at an average annual rate of 17.7% over the next 5 years.
Despite having an inferior stock performance compared to the S&P 500 index, Las Vegas Sands operates very profitably on a book value basis: the return on equity stands at 20%, the net profit margin at 21%. Investors who buy this undervalued, highly profitable casino operator also get a 2.5 % dividend on the way.
Las Vegas Sands currently trades at 12.5x times earnings which represents a corresponding high earnings yield of 8%. Analysts are pretty uncertain about LVS' future earnings: The low estimate for the 2013 EPS stands at $2.16 and the high estimate at $3.71, with the average coming in at $3.08. I am somewhat more optimistic as to the EPS development going forward based on the profitability of Macau and an optimistic assumption about the economic recovery of the US and Las Vegas in particular. Las Vegas is the gambling destination number 1 in North America and will continue to be highly dependent on the overall state of the economy. Once the economy improves, Las Vegas and its casino operators should be the first to feel its resurgence and their share prices should respond accordingly.
I have revised my model to incorporate consensus EPS growth assumptions: I estimate that LVS can grow its EPS by 15%, in line with analysts, from its 2013 average EPS estimate of $3.08. In this case, the 2014 EPS would stand at $3.54. Applying a multiple of only 15 (which is discounting the highly profitable presence in Macau) the intrinsic value of Las Vegas Sands would stand at $53 - stipulating about 35% upside - which is still significantly lower than UBSs' estimated target price of $67. UBS reiterated its BUY rating in late April with a price target of $67 which represents about 70% upside potential from current quotes at $40. Given this apparant undervaluation, I rate Las Vegas Sands a Buy.
On a technical level, the stock is clearly oversold. The shares are just about to test its resistance level at $40 where a previous bottom has been established in December last year. In case the stock price can rebound from this level, the stock could build immediate momentum to reach higher. A break of the support zone would signal a bearish call in the short-run. However, our intrinsic value estimate of $60 would remain untouched.