Las Vegas Sands: Gaming in Macao

Las Vegas Sands Corp. (LVS) traded sharply lower this week on news that the Chinese government is likely to restrict travel to Macao.  The conflict between free market economics and traditional Chinese communism is becoming apparent as China restrictions are now challenging businesses after significant investments have been made.  Within the past few months the government has restricted visas for nationals traveling to Macao to only be available once every two months.  The most recent report is that the limits will be changed to only allow visits once every six months. 

Timing for this new regulation could not have been worse for operators on the strip.  Las Vegas Sands faces the potential for extreme challenges as many of its development projects go online over the next year.  Room capacity will increase sharply, retail locations will be available to rent, gaming rooms will come online, and yet traffic from Chinese citizens may slow to a modest hum.  This is completely unacceptable for a company that has borrowed and invested billions of dollars to develop the properties.

Looking at the most recent earnings announcement from LVS (which took place well before the travel news broke) it appeared the company was already facing pressure.  While revenue came in at $1.11 billion for the second quarter, earnings or adjusted net income dropped to a measly $30.9 million or $0.09 per share.  This compares to a gain of $0.23 last year.  Management states that the decrease represents a decline in net operating income due to higher expenses and a sharp increase in interest expense.  This interest expense may become a heavy load to carry if revenues are not able to rise substantially to keep up with this expense.  

Debt balances certainly weren’t advertised in the quarterly report issued by the company, but looking at my Thomson One platform it appears the total long-term debt is roughly $8.8 billion dollars.  While of course this debt is backed up by the value of the properties LVS has built, the service on such debt is enormous and leaves the company highly leveraged.  This is not a problem for shareholders when operations are running smoothly.  In fact, during times of stable growth, a leveraged company returns more equity to shareholders than one with a more conservative approach.  But the sword cuts both ways and the risk becomes much more concerning if operations are challenged.

The stock has seen a sharp decline over the past 12 months.  This should be no surprise to readers who followed our posts in January and February.  However despite carrying a much smaller market value, the shares still look to have a good deal of risk in them.  Analysts are expecting earnings of $1.07 per share next year which may end up being optimistic.  But assuming they are correct, the stock still trades at more than 40 times expected earnings a full year away.  That is a fairly high multiple for an uncertain story and I wouldn’t be surprised to see the stock to continue to trade lower throughout the quarter.  

Please use caution with this name whether long or short because the volatility can be quite violent in either direction.

LVS Notes

FD: Author does not have a position in LVS.

Comments

[Richard Col...:]

You forgot to mention there are challenges for all growing companies plus I bet you didn'y know that Sheldon Adelson is the 12th richest man in the world and owns 70% of the LVS. Also you were not the only one predicting a sharp decline last year as this was highly publicized in October of 2007. Now is the time to accumulate gaming stocks and don't try to guess when they will turn around, It could be next week or it could be a year from now, but the downward pressure is limited and the upward momentium will surprise you.
Daniel Kowkabany

2008 Aug 21 10:29 AM

[Zachary Sch...:]

Daniel,

Thanks for the comment! You're right in that there were definitely plenty of skeptics last year - as well as plenty of bright people betting the stock would continue to run. The thing with LVS is that China holds a wild-card that is impossible to handicap. I want to be invested in stocks where I can see the driving forces and understand what can make those forces change. To bet on whether or not the Chinese government will or will not accommodate the business makes me very nervous.

Appreciate your thoughts,
Zach
zachstocks.com

2008 Aug 22 07:48 AM