2023-09-20 16:24:33 ET
Summary
- Las Vegas Sands Corp. stock is undervalued and Mr. Market is blind to its potential.
- Las Vegas Sands has a strong balance sheet, cash position, and is experiencing a rapid recovery in its Asian markets.
- Despite its strong fundamentals, the stock is stuck in lower trading ranges and is not responding to its bullish state.
“If you want something you’ve never had, you must be willing to do something you’ve never done…”
Thomas Jefferson.
The case to buy LVS now has never been stronger
My view of the shares of Las Vegas Sands Corp. ( LVS ) over years has been the persistent puzzle to me as to why Mr. Market appears to be blind—repeat blind—to the colossal undervalued price of this stock and the company behind it.
Above: What is Mr. Market missing here? Or does he know something we still can't figure out that easily?
I’m not one to assume that I have always had the correct take on many a stock, no less the future of the company it represents. I have plunged many times into the possible rationale for LVS’ cheap trading range. After all, there is long -term wide agreement in the premise that ultimately markets are an accurate price discovery mechanism. Yet, the wisdom of markets often takes vacation and snoozes through opportunities on one hand, and or gets wildly ODed on stocks that turn out to be whiffs disguised as four baggers.
I must stipulate here that I come from a 180-degree knowledge of the company and some of its key leaders over time. Way back in the day, I competed with its precursor company in Atlantic City. I also shared time kicking around takes on the industry with fellow casino executives who worked for Sheldon Adelson. We had consensus back then: Adelson was by any measure a certified, but tough-minded, genius in the business. Its current CEO, Rob Goldstein, a lawyer by trade, began his career way back in the rough and tumble junket business. Over time, he’s transformed himself into a worthy CEO of an LVS few ever imagined would grow to its massive leadership presence. Since Adelson’s death, there has been concern at what many investors see as a sometimes rudderless ship, no longer with a certain port destination. The covid crisis exacerbated that view.
The early 2022 closing of the $6.2b sale of LVS Vegas properties has been criticized as being badly timed, given the robust post-covid recovery on the strip. Part of the rationale put out by management at the time was that: a) LVS’s primary future was in Asia; b) The company would be seeking to develop in a third Asian country if opportunities opened there; c) The company was considering an entry into online gaming, an area of visceral opposition from Adelson; and d) Were an opportunity in a major U.S. market like New York or Texas open, LVS would be a front row bidder to build.
Thus far only one of these pronounced pivot shifts to the LVS business model has nudged ahead. That is its bid for one of the three gaming licenses to be issued by the state for the metro NYC area. The company has been less vocal about its intentions for another Asian nation despite a decision last spring by Thai authorities to legalize casinos there.
There is little doubt that LVS would be the 600lb gorilla in the room if and when Thailand begins to move seriously beyond words. So what we have seen that perhaps is partially responsible for Mr. Market’s continuing meh response to LVS stock, is a lack of conviction that its exit from Vegas and happy talk on other fronts has gone nowhere.
Above: Long-term GuruFocus forecast agrees with our view that LVS has been and is appreciably undervalued.
Confidence in the current leadership has clearly waned since the death of Adelson. Goldstein and his key people are seen as good stewards, but not guiding visionaries in taking LVS to the next, promised step. Their timidity per se, has been attributed to several causes.
One, after nearly three years since the Vegas sale, LVS' majority holder, Dr. Miriam Adelson’s medical foundation appears to be perfectly happy with keeping its 50%+ equity position whole. The recovery in Asia post-covid means the return of dividends and a half a buck of every dollar declared, goes to the foundation.
Two, its (ttm) cash pile of $5.7b is among the tallest in the sector., It positions the company to act quickly with more equity put into any given new development that will keep debt in check.
Above: Long-term leadership will be sustained and increased as we get farther away from the covid era and LVS property investments underway mature.
Three, the faster-than-anticipated recovery of GGR in both Singapore and Macau that is already producing impressive gains in revenue and operating profits for LVS has contributed to a don’t rock the boat mentality in management. Genius is not required here: Take a powerful surge of revenue from existing markets, add a strong balance sheet and await what could be a game changer if New York taps LVS for a metro area license and you have a comfortable waiting game. Outside of Vegas, the history of LVS has been something of a shoulder shrug.
It is to be remembered that they had a footprint in Bethlehem PA, for ten years in a renovated steel plant. The property did fairly well but in 2019, LVS sold it to a tribal group for $1.3b with Adelson telling the Street that it was too small scale for corporate ambitions at that time. Their current ambition for a New York mega property in the nation’s biggest market sounds like a plan. LVS is competing against two existing state licensees of long tenure, MGM ( MGM ) with its racino property just over the city line, and Genting’s Resorts World property in the city’s borough of Queens.
Recent revelations about a dismissed Resorts World Vegas executive who may have stepped over the regulatory line during his tenure at both companies could injure their shoo-in status. No matter the outcome, Mr. Market is not likely to see this prospect at this time as a reason to be in the stock.
Four, Mr. Market inexplicably, does not appear to be impressed with the phenomenally rapid recovery arc seen in both LVS markets since Beijing dropped its zero covid policy last January. The performance through 2Q23, and we believe an even better one ahead for 3Q23, has produced crickets.
And that by far has produced an unfathomable indifference to the shares of LVS by Mr. Market. In fact, the stock has sagged a bit since its last earnings release. So whether investors believe management is too timid, under the mandates of the Adelson Foundation, or status quo happy or just waiting to pounce if New York happens, the result is in our view, the same:
At its current price, Mr. Market is staring a screaming buy in the face and yet sitting on its hands.
Above: Under the most conservative estimates, fair value is $63.20 far above the current price at writing of $48.
Mr. Market’s valuations of LVS and peers MGM and CZR before 3Q23 earnings begin to arrive
We have been fans of LVS and its two nearest peers for several years now. We have made the cases we believe that the shares of MGM Resorts ((MGM)) and Caesars Entertainment ( CZR ) have likewise been underappreciated over time. They are all solid performers in gaming with much rationale going to support bullish forward scenarios for them.
And that leads us to the concept of relative value. In other words, relative to close peers, what does the LVS share price feel like? Fairly valued given the sector? Overvalued for reasons we can’t see as dispositive. Or undervalued and to what extent?
Company Price at writing MC Revenue (ttm)
LVS $48.83 $37.1b 6.7b
MGM 39.33 13. 7 14.4b
CZR 44.81 10.7b 11.4b
Balance sheet highlights
Company Cash (mrq) LT debt Current ratio
LVS: $5.7b $14.2b 2.77
MGM: 3.83b 32.1b 2.04
CZR: 1.1b 26b 0.78
For 2Q23 LVS reported revenues of $2.54b with a net income of $368m. EBITDA was $973m---the highest quarter posted since 2019. Analyst outlook for the fiscal year 2023 earnings $1.93 with a projected 2024 at $2.96. Projections for revenue in 2023 and 2024 according to a consensus of analysts:
2023: $10.3b. Our calculations geared to the velocity we see in Macau recovery arc gets us to $10.93b for this year. Analyst estimates for 2024 $12.290b. Our forecast based on reaching 100% of 2019 run rate before the end of 1Q24 brings us to an annual forecast of $13.3b for 2024. LVS declared $0.02 a share dividend last month and we expect a general return to dividends to continue.
Conclusion
Consensus analyst price target ("PT") still remains around $70. We have raised our own PT to the range of $75-$80 by early Q24. SWS has calculated the discounted cash flow ("DCF") fair value at $63, or ~18% undervalued at this point.
We put this on the conservative side. YTD Macau has already seen 17.4m visitors, picking up monthly since the end of zero covid. But officials expect average daily footfall to get back to 100,000 per day by the time of the Golden Week 8 day holiday in October. That month will be the first month since the end of zero covid that Macau will truly be firing on all cylinders as its monthly GGR inches ever closer to 2019 baseline.
In August, it continued posting GGR above the US$2b mark. (September was negatively impacted by the typhoon and Hong Kong flooding disruptions). Total flight schedules in and out of Singapore have reached 71% of pre-covid levels and are expected to improve over the Golden Week period.
What is remarkable in our view is the pace of recovery Macau and Singapore is continuing despite the ongoing economic strains in China. Right now, LVS has all its money bet on Asia in two jurisdictions that are showing robust recovery in a rapid run rate. Yet by any comparison, its shares still do not appear to be responding to that bullish state of affairs. We have conjectured as to why after a deep dive study of the stock over many years.
Here you have a company, dominant in the globe’s largest gaming market, speeding to earnings recovery faster than most analysts first thought. It is a company with a strong balance sheet, relatively lower debt against its industry peers, strong cash positions going forward to possible expansions ahead. And it has been judicious in capital allocation building for the future both in Macau and Singapore capex expansions.
And yet, defying logic, the stock seems stuck in considerably lower trading ranges far too long. At the same time it trades at very similar levels to both MGM and CZR. We may have a market wide lack of interest at the moment in the sector in general.
Or something more basic could be at work here. Just as we can detect a recurrent proclivity of the stock market to overvalue some stocks in favored sectors, for no reasonable rationales, there is a puzzling likewise meh among other stocks with strong numbers. But when that seeming indifference reaches the level of gap between the prospects for Las Vegas Sands Corp. and the reality of its trading range, one has I believe, discovered an alpha hidden in that indifference.
You pass this one up at what could be a heavy price.
For further details see:
Las Vegas Sands: Strong Buy Case Cannot Be Ignored Much Longer