"Observe due measure, for right timing is in all things the most important factor…" - Hesiod, circa 750-650 B.C.
There is a coterie of Macau watchers who bear a noticeable resemblance to those senior citizens one observes in Florida who get up each day, head for the local CVS, and sit down at the blood pressure machine to reassure themselves they're not looking over the precipice of an imminent heart attack. Thus they can, excuse the pun, breathe easy another day. Tracking the health of monthly Macau GGR (gross gaming revenue) unto itself is a harmless exercise. Some people do it for a living and that's totally fine.
Our problem is not with following the numbers; we watch them ourselves. But ascribing to a single month or even sequence of several months as omens of a precipitous collapse of the world's largest gaming market borders on absurdity, in our view. Trends are naturally important, but if you were to base your investment and trading plays entirely on relatively short-term trends alone you could well be missing the key elements in the story of the stock. Even long-term trends, a far more accurate take on the market, can disguise deeper truths about Macau's future and thus deprive investors of an insight that could cause them to leave far too much money on the table. That's the principal reason why Las Vegas Sands (NYSE:LVS), a solid performer in Macau gaming over time, continues to slosh in a trading range we believe is well below its longer-term value.
And its why we have confidence in our long-term guidance number for the shares to move into the high $60s to low $70s range despite the downward spiral triggered by the junket crackdown that began in 2014 with a year-over-year 2.6% decline in Macau GGR, followed by the disastrous 34.3% drop in 2015. Yet for the first 5 months of 2016, Macau GGR is down 11.9% and will likely dip into single figures to flat, ending the year on either a low minus single figure number to a slight plus of 1.5% above 2015.
So the declines are narrowing -- it's undeniable that we will not return to 34% or more declines going forward unless, of course, the Chinese government has some new jack-in-the-box surprise waiting for the industry. Nobody can find symptoms of that using any blood pressure machine we've heard of to date.
A perspective on Las Vega Sands seen neither through rose-colored glasses nor as a disaster movie tells us the stock is cheap:
- Price at writing: $47.60
- 52-week trading range: $34.88--$57.71
- Market cap: $37.83b
- Dividend and yield: $2.88 (6.18%)
- High target: $62
- Low target: $42.00
- Mean target: $56.50
Here's a short snapshot of key LVS indicators:
- 2015 revenue $11.39b -- yes, down big time due to the VIP headwinds, but still formidable
- Revenue per share: $14.31
- Operating margin (ttm): 24%
- Return on assets : 8.25
- Return on equity: 26.07%
So, here you have a company bearing up against brutal government policy-induced headwinds for nearly two years still churning out nearly $11.5 billion in revenue, with an operating margin of 24%. Add a good performance in Singapore, Las Vegas and Bethlehem, Pa., and what do you get? A solid balance sheet that assures investors that a) LVS has the cash flow to meet debt service comfortably with maturities that pose no challenges, and b) a management that is intensely committed to continue paying dividends currently at $2.88, yielding 6.8%. Compare that return with any other operator in the gaming sector, or the entire gaming/lodging/hospitality space. Also, the company has an expanding capacity base in Macau in a slowly repairing market.
A Blood Pressure Take on 2016 GGR
Sanford C. Bernstein's Hong Kong office reports that they expect a total decline of Macau 2016 GGR in the 3.5% range. This is down from an earlier forecast of a 1% increase. So let's use that number to take a broader based view:
- 2014 GGR: fell 2.6% year over year from 2013.
- 2015 GGR: fell 34.3% from 2014
- 2016 GGR: (est.) fall 3.5% from 2015
Our point here should be clear: Nobody is doing cartwheels looking back to the days when Macau was posting double-digit year-over-year increases. However, let's get some additional perspective from Professor Samuel Huang of the Macau Polytechnic Institute, who studied industry projections for the government's Mid-Term Review. He forecasts that by 2020 Macau GGR will return and stabilize to around $38 billion, taking into account the arrival and capacity of new projects soon to open -- Wynn (NASDAQ:WYNN) in August, LVS Parisian in September, and MGM (NYSE:MGM) in early 2017. That is against $28.85 billion GGR attained in 2015 under horrible government-created headwinds, as well as a slackening Chinese economy.
Professor Huang attributes this recovery to the continuing increases in mass and premium mass play offsetting the heavy losses already incurred and diminishing in total VIP market dominance. Overall, both he and other long-term observers of the market see stabilization no longer as a wish but a reality. That view, which by any measure is reasonable, contains nothing but good news for investors in Macau --but Las Vegas Sands in particular. It remains the mass play powerhouse, among the most efficient margin operators, strongly financed, dividend-committed companies in the business.
Yet the stock continues to go sideways. LVS has a remarkably good story financially and operationally, strong institutional support, reliable dividend flow, and a future that looks a lot better than the recent past in Macau. So why the sloshing?
We've talked to our industry sources in Macau as to why they think the confidence level in an upside for LVS isn't stronger and expressing itself in its pricing. Here's a pretty broad consensus of what we learned:
1. Many investors believe the opening of the Parisian and Wynn this fall will trigger further dilution of the market and not stem the tide of y-o-y monthly GGR declines, even narrowing as they are.
2. There is an undercurrent of fear that the China government still has bullets left to fire despite (these are local Chinese execs with good contacts in government circles who are telling us this) the clear evidence to date that the various drastic crackdown policy moves are long past us. All agree there is no certainty in any government move, yet most strongly believe that the VIP sector damage is well under control and nothing of that magnitude is foreseeable.
3. There is some continuing worry about the global economy in general and its impact on the Chinese economy specifically. Our sources pointed to the core premium mass business largely coming from small business entrepreneurs and managerial class players are "sitting on the runway," to use one executive's phrase, until they get a stronger sense of recovery long term trending closer to 7% GDP or higher for China.
4. The consensus believes that the long promised travel infrastructure improvements would arrive too late to have a positive impact on LVS shares in the short term. Yet all agree that when those facilities are up and running it will be "a blowout win for LVS nobody can yet grasp in full. Its just too far away as a basis to trade right now," said one banker we know who runs portfolios for high net worth investors. He agreed LVS is now at a great entry point.
There are the persistent outliers as well. Things like the LVS management succession question, the possibility of CEO Sheldon Adelson unloading some chunk of his equity, or the long-term jitters about concession renewal in 2020. Our sources feel the concessions will all be renewed given the disinclination of the government to get involved in the gambling business. So, how do you make the case for an upside now for LVS?
It's simple. Stop taking your blood pressure every month praying for a positive tone to the GGR number before you give LVS a good hard look. View this company with a panoramic lens focused on the 2016-20 area. Also, remember that when Macau was killing it in the pre-crackdown years, LVS had risen as high as $88 a share. Yet in many ways it's a stronger company today because:
1. It is less-than-ever dependent on a VIP market and its room and amenity capacity is expanded.
2. It has proven to be a durable payer of dividends through tough headwinds.
3. It has improved cost controls and margins, proving itself to be an efficient responder to market conditions.
If you are a buyer of LVS today at $47, for example, you are in many ways getting a stronger company discounted 50% off its historic high. That was reached when market ebullience couldn't resist bidding up the shares based on the spectacular y-o-y GGR performances.
We think that as we approach closer to the opening of the Parisian current holders of the shares will heavy up and new believers will be added as the dominant negative sentiment that has dogged Macau -- and by extension LVS -- over the past year will diminish. And we believe the current inching up we're seeing in the shares over the past six weeks will begin to escalate.
In the short term, we see LVS moving to a support level around $50-$53. And as long as y-o-y GGR numbers continue to narrow each month, stabilization is already here. That in itself augurs very well for these vastly undervalued shares.
About the author: Howard Jay Klein is a 25+ years veteran c-level casino executive and industry consultant. He is the author of Mastering the Art of Casino Management and the publisher of The House Edge premium site on Seeking Alpha. His own gaming portfolio is in a blind trust for his family to avoid potential conflict of interest problems with past, present or future industry clients.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.