2023-04-13 13:00:48 ET
Summary
- Las Vegas Sands Corp. has remained undervalued even in a post-covid world because Mr. Market worries about some structural changes needed ahead.
- Up until the FY22 results, the stock has moved 33% north--but remains undervalued in terms of what lies just ahead.
- Zero-covid in China ended last Jan. 6th, triggering a surge of revenue recovery in Macau still not fully baked into Las Vegas Sands Corp. stock.
We have long been fans of Las Vegas Sands Corp. (LVS) for many reasons, among which is the persistent hesitancy in Mr. Market's collective mind that shrugs at what it believes to be key issues that inhibit its growth arc post-covid. To seem like a contrarian on a stock like this is odd. This is not to imply that the wariness we detect doesn't have validity-to an extent it does. But we also believe those factors reflect a state of mind that does not see any meaningful change that would put the shares now in the goldilocks rally category. I do. And that change is the sleeping beauty state of Macau, just beginning to awake to find its Prince Charming in LVS ready to rock record revenues.
Here's what I sense from many investors, both retail as well as institutional, who remain skeptical that LVS has pivoted toward the future.
- Two years after the death of its visionary founder Sheldon Adelson, there has been little indication that his widow, Dr. Miriam Adelson, and her foundation are committed to anything but a business as usual outlook. We have no sense that both management and the board are willing to take enough equity off the table to broaden the percentage of outstanding shares inviting greater participation by a vast pool of retail investors. Clearly there was, and apparently still is, a reason for the late Adelson's cry of "yay dividends!" as the foundation took off fifty cents for every dollar declared.
- That's understandable, of course. What is not understandable is the lack of a policy to take a considerable chunk of that equity off the table, leave some and ignite a possible prospect of a huge upside for the shares.
- The board: Whether it is pure ageism, or concern for the future among many investors, the perception that LVS has a geriatric board long in need of fresh blood to nudge the heirs and managers is real. LVS is a dominant presence in the global gaming industry. The idea of moving toward a more aggressive set of priorities in the interests of shareholders is valid.
- The lawsuit: In the interests of the warts and all reporting style of many market watchers, we have the continuing allusions to a long pending lawsuit against LVS by ex-partners. According to our legal associates, the ex-partners from back in the day pre-Macau licensing for LVS, claim a contract was breeched when LVS exited their deal to hook up with another Asian partner.
- Our guys believe the suit falls into a money grab effort aiming at some kind of payday settlement. The lower court has agreed and ruled in favor of LVS. Lawyers we talked to who have no dog in the fight agree that the first ruling will hold up through multiple appeals. While all these kind of suits can be unpredictable, so there is no certainty of anything, it would appear that with its resources supported by lower court definite opinion that LVS should have the final upper hand. The point is: that should not be a reason NOT to buy the stock at this point.
Since the death of Adelson, the company has made some moves and some promises as well. It sold its Las Vegas assets for $6.2b with the idea of using the proceeds to develop an IR in a third Asian country. They also expressed serious interest in snaring one of the three soon to be named winners of licenses to build an IR in the New York metropolitan area. But they have not moved per se in Asia, where their strength lies. It is to be recalled that LVS bought into Sands Bethlehem, PA. only to sell it for $1.3b to a tribal ground a year and a half later. They have an excellent site in suburban Long Island should they prevail, but thus far, no evidence that they are on the move in Asia.
There has been much speculation about an LVS move in Thailand, which recently had a favorable legislative report on legalizing casinos. LVS would be a natural. But, realistically, this would be at least 5 years away.
C-suite management: I was an industry colleague of LVS CEO, Rob Goldstein, way back in our Atlantic City days. He was and is a first class operator. Goldstein is in his mid to late sixties. Below him is Patrick Dumont, in his late forties, who is the son-in-law of Dr. Adelson. Should Goldstein remain in place for the foreseeable next five years at least, the company will be in good hands. But just as the succession concern had seemed not to be part of Adelson's outlook till very late in the game, there does not appear to be a clear ladder ahead for anyone. Dumont is the heir presumptive. His background is in finance, he's in the COO seat, a perfect place to learn.
Summary of the above issues: they should not be major "proceed with caution" issue to investors when the tailwind side of the LVS propulsion is so bullish ahead.
The Las Vegas Sands Corp. bull case only gets better
In this kind of market, a decision to buy, sell or hold, has so many more complexities attached to it that it is tough to make a case purely on results. Yes, earnings count, debt counts, cash on hand, counts, ability to control costs, count and above all, quality of management counts.
But what counts most is the sector realities that companies must face every day. What is happening in the sector to everyone? Which companies appear to best weather headwinds than others? Which companies have the closest business model to moats-if any? What is the debt burden, will it be met? And most of all, what do monthly revenue flows tell us about what may lie ahead for a stock?
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LVS at writing: $56.85
Price at publication of my last LVS article: $53.11
1 year Analysis consensus price target: $65
Our PT (price target) published a month ago: $73.
Since the turn of the year, a consensus among analysts and industry observers has been moved north twice and now stands at an estimate that Macau gross gaming revenue for 2023 could hit 70% of the pre-covid 2019 baseline of $37.7b. There is also a consensus that 2024 will see gross gaming revenue hit 2019 baseline or better. We are calculating a 2024 revenue target of ~$38,7b to $39.6b. That is for gaming only. For 1Q23, monthly win for Macau has run between $1.3b to $1.5b. We believe that mid to late 2Q23, the market will have a run rate comfortably at or near $2b.
Macau officials have set goals for the renewed licensees to reach 30% of their revenue in non-gaming. All agree that is a vastly ambitious target. With massive additions of non-gaming attractions including rooms, themed public space, theme parks, dining, shopping, we believe at best, near term, the 10% of gaming reached in 2019 for non-gaming, can hit 15%.
Total tourist arrivals to Macau in baseline 2019 hit 39.4m. Of these, 29m trips originated from mainland China with another 7.4m coming from Hong Kong. We see 2023 producing between 18.3m to $20m China/Hong Kong only group and individual tourist arrivals in Macau. This figure or more is supported by the macro GDP percentage of +5% for China as it rapidly recovers from its massive bungling of the covid policy.
Let's use a $38b target as our basis for 2024. Assuming all six concessionaires complete their primary non-gaming attractions already in progress early in the year, that would add ~5b in total revenues or $43b. Our forecast based on total footfall, tourist revival from China, average bets calculated by customer mix from mass, to premium mass to VIP, gets us to $9b by end of this year and $12.6b by 2024.
We see LVS as gaining exponential revenue and earnings now as both Macau and Singapore are firing on all engines. Unless there is a black swan recurrence of covid, or some politically disruptive force no one can now identify other than pure conjecture, Macau is back on track stronger than ever and leading with its biggest market share and room capacity by far (12,000). Competition will clearly become fierce as all operators scramble hard with events and marketing programs to win back their customers as well as pluck off new ones from peers.
But overall it is difficult to find a sector today with essentially seems to us as a new, square one re-birth.
Next week's earnings report from our view should reflect much of this ongoing good news. What other factors may become ants at the picnic, we, nor does anyone else, yet know. But it seems to us on a pure value basis, at $56 a share with its prospects, Las Vegas Sands Corp. remains a shrug for far too many investors.
After note: For those who will read or listen to the earnings call, keep tuned for any word about the return on dividends. It was part of Adelson's religion. And remains one with the foundation too-we expect.
For further details see:
Las Vegas Sands: Next Week's Earnings Release Should Have Good News For Investors