It is always interesting to see how intangible events are tangibly priced in the market. While an earnings miss or a company's decision to lower guidance is fairly easy to price into a stock, it isn't as easy to price in headline risk when an investigation of a companies business practices is announced.
I recently wrote that Las Vegas Sands should be sold ahead of its second quarter earnings report. While all traders have good calls and bad ones, this call was correct.
My primary reason for believing that Las Vegas Sands (LVS) and other large foreign casinos heavily leveraged to Macau were strong sells, is that these companies experienced had recently reported record profits just several months ago, and the companies revenues in Macau have only slowed recently. Macau had held up very well even as economic data in China has continued to weaken over the last year, and the weak June revenue numbers in Macau suggested this Macau province was seeing a significant deceleration in revenues. Still, July casino revenues in Macau grew at the slowest pace since 2009, and Wynn (WYNN), Las Vegas Sands, and MGM Resorts (MGM), have all reported poor earnings in the last month, and the Justice Department just announced a new probe into Las Vegas Sands concerning the company's possible involvement in money laundering.
While Macau is likely to remain weak in coming quarters, and the recently announced Justice Department Investigation will likely some time to resolve, the fact that Macau grew at its slowest rates since 2009 suggests that revenues in this previously fast growing province are unlikely to decline significantly from today's levels, and Las Vegas Sands and Wynn have both recently reported significantly slowing growth in Macau as well.
Las Vegas Sands had to significantly change the company's business model after the 2008 financial collapse and subsequent recession. The company used real estate development projects to finance its business operations prior to the real estate collapse, and the company leveraged its holdings to finance the company's core business operations. When the real estate market collapsed in 2008 the company was essentially insolvent, and massive reinvestment by Sheldon Anderson and significant refinancing was needed to save the company.
Today the company's business model is very different. In addition to having a very strong balance sheet and strong cash flow, Las Vegas Sands also has very manageable long-term debt of around $8 billion, and the companies revenues are still strong.
Las Vegas Sands has also been the most successful foreign operator Macau for some time, and the company recently obtaining permits to build a major new casino and resort in central Cotai. Las Vegas Sands also recently replaced its management team in Macau, and the company has taken significant market share from the Wynn (WYNN) amongst higher end bettors.
This is why I thought the timing of the recent announcement that the Justice Department Las Vegas Sands will be investigated for possible money laundering was so interesting. Specifically, the U.S. attorney's office briefly discussed that the focus of the investigation would be Las Vegas Sands Macau, with allegations that several individuals involved with the drug trade in North America were laundering several million dollars through the companies Macau casinos.
Las Vegas Sands has increasingly been taking market share at the higher end over the last several quarters, and the Justice Department lawsuit comes after just three months after the company reported its best quarter in April. With Las Vegas Sands increasingly attracting high net worth bettors, the company became an easy target for what looks like a largely political probe of Las Vegas Sands' Macau operations.
As an attorney, it is interesting to see how political Justice Department probes can be. While, certainly, most lawsuit the Justice Department initiates are based on the law, U.S. attorneys often target political opponents of the President. Two recent examples of this tactic both parties have used for years are Karl Rove's use of U.S. attorneys to target the Governor of Georgia and other political opponents, and the Bush administration's refusal to use the Federal Government's power to prevent Enron for fixing California's electricity prices when potential presidential candidate Grey Davis was the governor. The Justice Department also tried to prevent the release of tapes implicating Enron. Obama also used lawsuits to kick political opponents off the ballot in Illinois, and the President had some of the toughest lobbyists in Chicago, such as David Axelrod, run his campaign.
With Sheldon Anderson already announcing his intent to spend up to $100 million on Romney's behalf, and Las Vegas Sands particularly vulnerable to allegations of money laundering, the timing of this recently announced investigation should be questioned. The only details released by the Justice Department are that individuals involved with the North American drug trade were allegedly laundering money through Las Vegas Sands's Macau casinos, and prosecuting a casino company for not taking more aggressive actions to investigate clients is a tenuous case at best.
Las Vegas Sands has faced investigations over alleged violations the Foreign Corrupt Practices Act in the past, and the company's business was not impaired at all. The reality is that the cost of doing business in Macau involves paying bribes, and many individuals with questionable backgrounds gamble in this province. Expecting a Casino to monitor its clients' sources of income is not reasonable, and given the high limits at Macau casinos, it is also unreasonable to think that Casinos in this province can report all of these company's clients' wagers to the proper authorities.
To conclude, I've believed Macau has been slowing for some time, and while the recent earnings reports of Las Vegas Sands and Wynn were very poor, Macau's awful July revenues suggest spending and visitation numbers in this province are likely at or near a bottom. July and August are also typically Macau's weakest months. Las Vegas Sands continues to take significant market share in Macau, and while Macau may likely remain weak near-term, expectations for this company are now very low.