2023-11-15 16:42:56 ET
Summary
- Las Vegas Sands Corp. continues to trade below its true value, despite positive performance and growth prospects.
- I compare Las Vegas Sands to The Walt Disney Company, highlighting the disparity in stock prices despite similar challenges.
- Las Vegas Sands reported strong Q3 2023 earnings and is expected to continue performing well in Macau and Singapore.
“Double double toil and trouble, fire burn and cauldron bubble...” Macbeth Act 4, William Shakespeare.
- Avoiding Las Vegas Sands Corp. (LVS) early into a robust recovery could be costly.
- Why it continues to trade below real value is a mystery wrapped in an enigma wound into a puzzle.
- There are no "aha" moments of alpha discovery buried in LVS' metric, but the Q3 2023 performance stands as a harbinger of lots of good news ahead.
Premise: By any measure, the trading range of LVS shares appears to have fully eluded any standard of measurement of its true value. Mr. Market appears to be totally blind to the stock in comparison to others which don’t come close to justifying the prices they command. It’s a true witches' brew mixture of bearish assumptions Mr. Market has swallowed.
Take The Walt Disney Company ( DIS )---even before the last 48 hour run up from the bullish inflation news . (LVS also got a bit of an inflation news spike). The stock has long been dead-pooled around $80. You had the Disney earnings call punctuated by CEO Bob Iger’s happy talk that hid the real headlines.
Streaming is still a loser, Marvel fatigue, overall film releases, a recent a trail of disasters, linear TV ad declines, stubborn resistance to recognizing that ESPN is indeed a dog with fleas no matter what bells and whistles are applied. But DIS will always have its heavy breathing lovers rooted nostalgia for when it was a solid performer. The stock now, rappelled up to $90, may or may not hold firm there. It’s not an apples to apples comparison yes—but I think it fairly reveals how some stocks just get a pass from Mr. Market and others like LVS simply bear lower valuations built in like weird DNA.
The bottom line : Given its positives — they are there — and its negatives, with heavy lifting ahead, DIS is overvalued in our opinion. At the same time, Mr. Market has little more than a shrug for LVS despite its recent knockout Q3 performance with an immense runway ahead both in Macau and Singapore.
If the stock market, as many believe, is the ultimate arbiter of value discovery, why has it appeared to sniff at LVS keeping its trading range way beneath what we believe to be is real value. We’re looking for this year's earnings to near $2.50 and for 2024 on a pace to reach over $4.00.
On Alpha Spread, we compared the best-case discounted cash flow ("DCF") values of DIS and LVS. We did not use base case because there are so many intangibles that can impact both stocks short term that the comparison loses heft. Plus, COVID-impacted numbers even for this year remain a factor.
DIS DCF best case value: $192.17
LVS DCF best case value: $90.59.
The differences here are simple: DIS has its major cyclical, financial, and structural challenges ahead still unsolved. It is far too early in their macro responses to forecast so bullish an outlook. Nostalgia bias is a factor.
LVS has, for all intents and purposes, all of its cyclical, financial and macro challenges behind it. The devastating COVID crisis and specifically China’s zero tolerance policy that had held it hostage in cash burn over two years has aftermaths. This is not to imply that LVS faces no macro headwinds. But black swans notwithstanding, continuing focus of Mr. Market on tangential issues impacting the LVS is what keeps it locked in a trading range well below what we believe to be a huge undervaluation.
We have been singing this song on Seeking Alpha for a long time. Perhaps readers of this space have grown weary of my Diogenes act, and that is perfectly noted. For those who are still unimpressed even after a knockout LVS Q3 2023 earnings release and the incredible speed of the Asian gaming recovery story in general, it is entirely understood. The witches' brew surrounding the stock for years is still a powerful potion. We get that. And we have examined all the negatives we could identify to support that shoulder shrug. But first, let’s take a look at LVS as it stands today as reflected in its 3Q performance and what that may presage the quarters ahead.
I begin first with a rhetorical question:
Let’s say you see a stock with the following attributes: Strong product, ebullient market, sound management, something of a moat, dominant market share, scale, comfortable ability to handle debt, and a capex calendar ahead that says management has two feet on the ground with a clear vision for its future. And best of all, it is trading well below its best case intrinsic value.
Would you buy that stock, and if not, why?
LVS Q3 highlights
Net revenues: $2.80b up 9.9% y/y.
Adj. Property EBITDA: $1.12b
Net income: $440m.
EPS: 55c vs loss (27c) y/y.
Margin: 40.1% (39.2% y/y hold normalized)/
Macau market outlook
Q3 2023 revenue: $5.1b (92% of baseline 2019)
Visitation from China: 2.01m (72% of 2019 baseline).
Note: MBS Singapore contributed $491m in adj. EBITDA, which represents 113% of base line 2019 with an EBITDA margin of 48.4%, outpacing Macau properties by over 8%.
LVS enjoys an estimated 22% share of market.
Long range: Official forecasts for 2023 Macau GGR are ~$23b, close to what the bulge analysts are predicting. I have talked at some length with my industry colleagues to formulate my own Macau target. We focus on trending average bets, average bankrolls compared to pre-covid, and measure that against rising arrival numbers. I think the market could scratch near $24b for this year and get near or just ahead of base line 2019 for 2024 in the range of $34b. Beyond that I am looking for the Macau market to reach $40b by 2026. Assuming LVS holds share, that would produce ~$9b in revenue.
zacks
Financial capsule
Cash & equiv. (mrq) $5.57b
Total liquidity: $9.743b
Debt: $14.17b
Net debt: $8.60b
Current ratio: 1.50
Near-term Maturities
2024: $1.8b 13% of total
2025: $3.57b 24% of total
2006: $3.4b 25% of total
This amounts to LVS having to meet 62% of its formidable debt load over the next three years. I suspect that there is a case to be made for negative sentiment among some investors as to LVS facing over $8b in debt repayment due over the next few years. We have looked at this blending as to what we believe will be, adequate access to capital and FCF growing against the strong forward prospects for both Macau and Singapore. So, It’s realistic to assume LVS can handle its debt comfortably. It should not be a primary reason to avoid the stock.
Dividends restored $0.80 (0.81% yield. No great shakes, of course, but evidence that management still hears the ghost of Sheldon Adelson cheering, “Yay dividends!). Of course listening to the massive clatter of dividend coni pouring into the Adelson foundation coffers is music to the ears of Dr. Adelson and her associates. We think as the recovery strengthens in the sequential quarters ahead we could see dividend yields go up.
Between dividends and stock repurchases, LVS says it has returned a grand total of $22b to shareholders over a ten- year period. Skeptics might raise an eyebrow here considering that for a good portion of the decade LVS shares have traded far below their true value partly because of the debt burden. On that basis, the ROI doesn’t look that good. However forward prospects after the cataclysm of covid are what count here. If you don’t buy that scenario, the stock isn’t for you.
The true witches' brew
The LVS trading ranges have been a head scratcher for some analysts for a very long time. Bearish sentiment does dog the stock until this day. Of every possible short and long-term headwind that presumably is responsible for the ongoing passivity of Mr. Market for LVS upside, here are the biggies:
Debt profile: Yes $14b is not pretty, nor is it ugly. Gaming has always been a high capex business simply because it lives on the never certain prospects of new legalizations that impose sudden urgencies to build massive brick and mortar edifices. Furthermore, as a long time veteran of the business, I can tell you that given the huge daily footfall in most successful casinos, the wear and tear factor on properties is immense.
There are persistent huge maintenance outlays such as room décor refreshments, new non-gaming attractions and tech related systems upgrades that never stop. That is why, with rare exceptions, all gaming operators bear debt levels that are not for every investor. Against this is the 24 /7 free cash flow built into the business model of successful casinos. As Carl Icahn has said, it is the easiest business in the world to understand. Only idiots can’t make money in casinos.
The bye bye Vegas move
LVS management triggered much criticism when it announced the sale of its Las Vegas assets for $6.2b in 2021. To some analysts it was snatching defeat from the jaws of victory. Vegas was just emerging from its covid disaster with a surging rise in gaming win, non-gaming revenues and footfall in the market. The LVS rationale was simple: We like Asia more than the U.S. going forward. But if something really interesting opens up in the U.S., we’re there. So, they took the money and ran. And what happens now coming up, is New York. (See below).
Adelson Equity levels hold
Many investors I have talked with do not like the idea of the Adelson family holding so much equity for so long. Their thesis is that if instead of ~50%+, they sold off half, and held 25%, this would have impact in trading volume, easier clarity for small holders, you name it. Insiders I know over time had urged Sheldon to unload a big chunk of equity not only for his personal wealth barometer but because it would in the long run have a salubrious impact on the stock price. He obviously resisted. Shall we echo, “Yay dividends!”
Yet consider this: Jeff Bezos' original equity in Amazon (AMZN) was pretty hefty yet by no means did it ever inhibit the rise in share value. Investors bought into the elegance of a business model long in proving itself, but once it had, it was a tree growing to the sky, Jeff or no Jeff.
LVS talks the talk but doesn’t walk the walk
This is a valid critique of management post Sheldon. First, they sold off Vegas assets and told the market they were laser-focused on Asia and investigating online gaming. They did a bit of lip service about Thailand, but nothing more. Online never happened. But periodic references to possibilities in the U.S. continued for the last several years. Now we have the very real possibility that LVS could well be a viable bidder for one of three new gaming licenses in the vast metro NY market.
LVS has acted by acquiring the site of the Nassau Colosseum, in suburban Long Island with a population base of 7.6m within easy driving distance. If it prevails, the plan is to initially put a temporary slot casino in the space while a state of the art integrated resort is built. The project could cost $2.7b,in our view. If LVS does win a licenses it could easily find a partner or, finance the project with a significant equity foundation so as not to further burden the balance sheet.
Never trust the Chinese, they say
There is reluctance among some investors to be wary of any investment in or near China given its clear but unstable geo-political ambitions that clash with our economic, political and defense interests. If you look at the record since 2015 forward, you can see how such attitudes can take hold. Beijing began harassing Macau with regulatory mandates, criminal investigations, accusations of money laundering. Threats were built into Macau changing rules on many issues. It reached a point where it most analyst reports contained warnings of wild rumors of Beijing confiscating the casinos, to preventing Macau from renewing concessions ran through Asia and found currency among some investors. Having done business in Asia-related casino matters for decades, I have come to understand that this would never happen. Not because of the kindness in Beijing hearts — that does not exist. What I learned and what still guides China policy today and likely always will was cash. They have never left a dime on the table. And they never will.
Macau is a money machine for the SAR, but in the big picture of the China economy it is barely a petty cash drawer. But it is a clear rousing success at its doorstep which adds to their global image, small as it is. It is part of their goal to stimulate global tourism. In China, ideology, ironclad as it is, stops at the cash register. So such fears have abated as Macau, despite all fears, renewed concessions and did not impose heavily punitive mandates on the operators.
Conclusion
At writing, LVS is $49.47 a share, up $1.86 due to the general market spike related to the inflation news. The Q3 2023 earnings report is the real news in that it indicates the edge of what see as a surging bullish tone to the two principal markets for LVS in Macau and Singapore. In Macau, it shares top position in market share with Galaxy Entertainment Group (HK0027) in a strong recovery mode.
In defiance of a plethora of reports about the sagging China economy, Macau continues its recovery path at a speedier pace than anyone has predicted. LVS is one of two market-leading spearheads expected to continue producing earnings gains in the quarters ahead.
I still fail to understand why the stock is stuck so far below where performance indicates it could trade. I am sticking to my price target ("PT") of $70. There are two reasons. One, I suspect 4Q23 and sequential quarters will continue to show hefty earnings increases. And two, -- it’s a bit of a dice roll, but if New York gives the nod to the LVS Long Island project, that news is worth a $5 a share alone in my view.
You have the potion from the witches' brew, Drink at your own heartburn in missing a big time upside with little downside risk ahead. Pomp poms back in the closet, we’re on the case.
For further details see:
Las Vegas Sands: Still Undervalued Due To Witches' Brew Of Investor Skepticism