Las Vegas Sands Corp. (LVS) is the leading global developer of destination properties that feature premium accommodations, world-class gaming, entertainment and retail, convention and exhibition facilities, celebrity chef restaurants and other amenities.
Share Price: $52.86/share (May 1, 2015)
Number of Shares: 798,510,417 shares of common stock (as of February 24, 2015).
Business operations
The company currently owns and operates integrated resorts in both Asia and the United states, through its properties in Macao, Singapore, and Las Vegas. Its Macao properties, through the company’s 70.1% ownership of Sands China Ltd., include the The Venetian Macao, Sands Cotai Central, the Four Seasons Hotel Macao, and the Plaza Casino, along with the anticipated completion and opening of The Parisian Macao in 2016. The company also owns and operates the iconic Marina Bay Sands, which has become one of Singapore’s major tourist, business and retail destinations since its opening in 2010. Completing its property ownership, the company’s properties in the United States include The Venetian Las Vegas and The Palazzo, Five-Diamond luxury resorts on the Las Vegas Strip, as well as the Sands Expo Center in Las Vegas and the Sands Bethlehem in Pennsylvania.
The company’s unique convention-based marketing strategy allows it to attract business travelers during the slower mid-week periods while leisure travelers fill the properties during the weekends, all of which allows the company to continue generating substantial cash flow while simultaneously pursuing new development opportunities. The properties are also differentiated by the company’s high-end gaming facilities and significant retail offering. The Paiza Clubs are located throughout the company’s properties and are an important part of the company’s VIP gaming marketing strategy, which encompass an exclusive invitation-only club available to premium players featuring high-end services and amenities.
Company history
1989: Founding Chairman and CEO Sheldon Adelson and his partners purchase the famous Sands Hotel.
1990: Sands Expo Center is opened across from the hotel.
1996: Sands Hotel is imploded to make room for The Venetian.
1997: Construction starts on The Venetian.
1999: The Venetian is completed and opened, with efforts focused on the convention and tradeshow industry.
2004: Las Vegas Sands focuses on Asian market and opens the Sands Macao in Macao, the only place on mainland China where casino gambling is legal.
2004: Adelson takes Las Vegas Sands public.
2005: Construction begins on The Palazzo.
2007: The Venetian Macao opens on the newly built Cotai Strip in Macao.
2008: The Plaza Macao opens next to The Venetian Macao, featuring The Four Seasons Hotel, The Paiza Mansions and The Plaza Casino.
2009: The Sands Casino Resort opens in Bethlehem, Pennsylvania.
2009: Initial public offering of Sands China Ltd. is completed.
2010: Marina Bay Sands opens in Singapore and posts a $600 million operating profit in the first eight months of operations.
2012: Sands Cotai Central opens in Macao, joining together its two sister properties on the Cotai Strip.
Management
Las Vegas Sands Corp. was founded by Mr. Sheldon G. Adelson, the company’s current CEO and chairman of the board. Mr. Adelson has long been credited with the change that has transformed Las Vegas from a city focused solely on the gaming industry to one that has now become the premier convention and exhibition city in the United States. His transformative ideas and confidence to execute accordingly has also led to successes in the company’s international businesses, as evidenced by the concept (and ultimate reality) of the Cotai Strip built across the bay between the Coloane and Taipa Islands and the resulting fully-integrated resort city of The Venetian Macao, The Plaza Macao, and the Sands Cotai Central, soon to be accompanied by The Parisian Macao in 2016. In addition to his many contributions in helping grow and evolve the industry (much to the company’s continuous financial success), Mr. Adelson, along with his wife Dr. Miriam Adelson, has also contributed greatly outside of the boardroom as a noted philanthropist, donating to a variety of civic and charitable causes.
Inside ownership
As of the latest Schedule 13D/A filing on February 17, 2015, Mr. and Dr. Adelson directly owned 65,914,941 shares and 97,971,021 shares, respectively, or collectively 20.52% of the company’s total shares outstanding. Including the shares held by Mr. Irwin Chafetz and Timothy Stein, Esq., as well as the shares held in the numerous trusts for the benefit of the Adelson family and friends, the collective group beneficially owns 431,863,556 shares, or 54.08% of the company’s total shares outstanding. Investors should take solace in the fact that their interests are shared by the management team and insiders, clearly demonstrated by the high level of inside ownership in the company.
Financial summary
Earnings
Las Vegas Sands recently announced earnings for the quarter ended March 31, 2015. While we will eventually work our way to these earnings results, let’s first focus on where the company ended 2014.
Per its 10-K filed on February 27, 2015, the company ended 2014 with the following earnings activity:
The following charts and information also show (1) the growth in the company’s revenues and net income, (2) the return on assets, equity, and capital, and (3) other key profitability and growth metrics, per GuruFocus:
Las Vegas Sands has continued to grow both revenues and earnings consistently throughout the past several years, showing a 2014 EPS growth of 25.65% (see the table above), as compared to the 3-year average EPS growth of 31.20%. The company has maintained incredible growth over the past several years, primarily through its Macau properties which are responsible for the vast majority of the company’s activity.
Perhaps more impressive is the returns generated on the company’s equity, assets, and capital. The 2014 activity ultimately led to returns of 38.75%, 12.70%, and 26.67%, respectively. These are among the highest returns in the industry, and have been steadily increasing over the past few years as shown in the chart above.
The company recently released its Q1 2015 earnings, which showed a slow-down in revenues and earnings, once again thanks to Macau. Net revenue for Q1 2015 only amounted to $3.01 billion as compared to $4.01 billion for Q1 in 2014, or a decrease of 24.9%. Net income for the quarter attributable to the company also saw a drop from last year’s comparable quarter from $776.2 million to $511.9 million, a decrease of 34.0%.
Financial Position
Las Vegas Sands had the following summarized balance sheet at the end of 2014:
The following charts and information also show (1) the change in company assets, liabilities, and equity, and (2) other key financial position and strength information, per GuruFocus:
The company has maintained a pretty consistent financial position over the past couple of years after a significant growth in both assets and liabilities throughout 2006-2009. While the debt has increased over the past few years, particularly to ensure survival and strength during the downturn during 2008-2009, liquidity has not been an issue and the company still boasts a safe interest coverage ratio of 14.95 times. In addition, the current ratio of 1.91 remains one of the top in the industry.
In its Q1 2015 earnings release, as of March 31, 2015, the company announced that it now has unrestricted cash balances of $2.41 billion and total debt outstanding (including the current portion) of $9.24 billion.
Cash Flows
Turning our attention to the company’s cash flows, the following table summarizes the operating, investing, and financing cash flows for 2014 as compared to the results from 2013:
In addition, the following chart from GuruFocus shows the changes to cash flow over the past 10 years:
Several important factors are worth noting here. For one, the company continues to display strong operating cash flows, growing 8.86% over the past year. After adjusting for capital expenditures, the company’s free cash flows have also increased from $3.54 billion in 2013 to $3.65 billion in 2014, or a change of 3.19%. The company continues to focus on the growth and development of its business and planned projects, as seen in the increase in capital expenditures from 2013, but these expenditures have clearly been more than absorbed through the increase in the company’s operating cash flows.
Secondly, it’s important to note the amount of cash that has been dedicated to returns to shareholders through dividends and share repurchases. Total dividends paid increased by 52.29%, with dividends now sitting at $0.65/share as paid in Q1 2015. The current annualized dividend yield is now 4.92% accordingly. In June 2013, the board of directors announced a stock repurchase program of $2.0 billion, expiring in June 2015. This program was completed by the end of 2014, and the board of directors has announced a repurchase program of an additional $2.0 billion in October 2014, set to expire in October 2016. Under the programs, the company has repurchased a total of 30,976,936 shares through the end of 2014, with 8,570,281 shares repurchased in 2013 and 22,406,655 shares repurchased in 2014.
Risks
Macao continues to be a significant portion of the company’s business, and many of the risks facing the company will be derived from these operations accordingly. Despite strong visitation from mainland China during the quarter, Macao continues to be a challenging operating environment, particularly in the VIP and premium mass gaming segments. This was evidenced in the company’s Q1 2015 operating results, which have since left the company’s shares down 6.26% from its $56.39 closing price on April 22, 2015, immediately before earnings were announced.
The company’s shares have also been under pressure over the past year due in part to a proposed tourist cap imposed by the Macao government, which would potentially limit the number of visits to 21 million from mainland tourists. While this would be devastating to the area’s growth in the convention and meeting space, during the Q1 2015 earnings conference call Mr. Adelson remained confident about Macao’s long-term growth, citing he felt there would be little chance of such a measure being imposed by the government.
While the slowdown in Macau has been the primary fear of investors, an additional concern coming out of the company’s earnings conference call was a lack of discussion around the continuation share repurchases. Las Vegas Sands had apparently ceased the repurchases in the first quarter of 2015, and according to the CEO, the company is currently focused on conserving cash for maintaining its current dividend and liquidity while also potentially readying itself for investment in a new market as well. This management team under the leadership of Mr. Adelson has time and time again proven its ability to capitalize on the opportunities seen before it, and investors should take this as a sign that the growth potentials in a new market or under current development projects must outweigh the value generated from repurchasing shares even at the current depressed prices.
Valuation
So far, we’ve discussed many of the background and ownership information of Las Vegas Sands, along with the operating results the company has attained and the risks the company (or an investor) faces moving forward. However, we all know that the factual information alone does not determine investing success. Perhaps the more important factor is the price an investor will pay in relation to such facts and circumstances. Accordingly, we will now turn our focus to the valuation metrics of Las Vegas Sands in determining whether this company poses a safe place for an investor to park his or her capital to generate a reasonable financial return.
To start, let’s take a look at several of the most common valuation metrics based on the current market price, as compared to the historic measure of these ratios. In the following in the following tables and charts, we will look at the price-to-earnings (P/E) ratio, the price-to-sales (P/S) ratio, the price-to-book (P/B) ratio, and the price-to-free cash flow (PFCF) ratio, all based on the trailing twelve month (TTM) data.
As seen in the top picture, Las Vegas Sands boasts several of the best valuation metrics in not only the industry as a whole, but also in its own history. Under the realization that most of these metrics generally revert to their mean in the long-term, at first glance the latter should be promising to investors that any capital invested today is being used to obtain some of the greatest amounts of earnings, sales, etc. per dollar invested than at most any other time throughout the company’s history.
This is even more evident when viewing each individual chart, which shows the corresponding price at the 10-year median ratio. For example, Las Vegas Sands currently shows a P/S ratio of 3.1 in the above chart. However, the 10-year median ratio is 4.258. If the company was trading at a price representative of this median valuation ratio, the share price would be approximately $72/share, or about 36% higher than the current market price. Similar results can be seen in the other valuation metrics shown in the charts above (it’s worth noting the P/B chart should be showing a price around $57/share based on the 10-year median P/B of 6.246 as compared to the current P/B of 5.80). What’s most interesting is that these results are shown at a time when the company’s operating and net margins remain strong, the company maintains a great degree of liquidity, and when the ROE, ROA, and ROC are among the highest they’ve been in the company’s history.
Based on these factors, it appears that the market’s fears of the risks in Macao and the lack of guidance regarding future share repurchases have created a large amount of downward pressure on the stock price of Las Vegas Sands. However, as we have all heard Mr. Buffett’s words, it is best to be greedy when others are fearful, and I believe the valuation metrics seen above are a perfect example of the (perhaps overblown) fears the market has currently priced into the shares today.
Investment strategies
Given the facts and the undervalued nature of the shares at today’s prices, the question a potential investor may be asking is how should one capitalize on such opportunity?
Of course the easiest answer and the one applicable to most investors would be to purchase shares with available capital at or around the current market price. Given that the share price has been suffering here in the past few weeks and has been following a slightly downward trend, an investor may want to set their order with a limit price slightly below the current price in case the shares may be attained at even lower levels.
To those investors wishing to attain a bit more returns from using capital to invest in Las Vegas Sands, an option-writing (i.e. option selling) strategy may be the right one for you. I typically use these strategies myself when entering and exiting positions in order to generate additional returns. As always, it’s important to note that options involve risk and are not suitable for everyone. Option trading can be speculative in nature and carry substantial risk of loss accordingly.
For those willing to purchase, say, 100 shares of Las Vegas Sands at the current market price, would you be even more willing to purchase those same 100 shares at a month or so from now at a price even lower than the market price? What if you could get paid to wait and purchase the shares at the lower price? This is essentially what writing cash-secured put options accomplish.
Instead of paying $52.86/share today, one could instead agree to buy the shares at $50.00/share on June 20, 2015, by selling 1 put option (1 option contract generally equates to 100 shares). This represents a discount to the current market price of about 5.41%. In agreeing to do so, an investor could currently be paid a premium of about $1.33/share (bid: $1.30 – ask: $1.37, absent of transaction fees) immediately. If the shares close on June 19th at a price below $50.00, you would purchase the 100 shares at $50.00/share, or $5,000. However, you would also have the $133 collected in premiums for selling the put option, leaving your true net cost of $4,867 for purchasing the shares, or $48.67/share. If the shares close on or above $50.00/share on June 19, the option expires worthless and you get to keep the $133 you were paid in premiums. This represents a gain of 2.66% on the $5,000 of capital that would have been used to acquire the shares, or about 20.23% on an annualized basis for the 48 days of the option’s life. You could then follow up the next month by writing a similar option to try and acquire the shares at a discounted price again.
However, you might not want to wait that long to acquire the shares, in fear of the shares running up in price in the short-term. Fear not, because an option-writing strategy can still be used. If you already own the shares or want to purchase the shares at today’s price, but still want to make sure you generate returns even if the stock price just hovers around its current levels for a while. While you of course will receive dividends for holding your shares, you can actually juice your yield even more by writing covered call options.
Say you purchase 100 shares today at the market price of $52.86/share. However, you want to generate additional money while you wait for your shares to appreciate in value. To accomplish this, you could sell 1 call option to sell your 100 shares at $55.00/share on June 20, 2015. This represents a premium of 4.05% to the current market price. In doing so, you could currently receive about $1.32/share (bid: $1.29 – ask: $1.36, absent of transaction fees) just for agreeing to sell your shares at this price. If shares of Las Vegas Sands take off and rise above $55.00/share by June 19th, you’ll sell your shares at $55.00/share and receive $5,500 in proceeds. Additionally, you’ll get to keep the $132 in premiums you collected for selling the call option. If the shares close on June 19th below $55.00/share (even if your shares rise to $54.99/share), the call option will expire worthless and you’ll again get to keep the $132 in premiums for selling the call option. You would keep your 100 shares, and would still have generated a gain of about 2.50% on your allocated capital ($132 / $5,286), or an annualized gain of about 18.99% based on the 48 days of the option contract’s life. Just as before, you could then sell another call option against the shares the next month in an attempt to generate additional returns.
Regardless of your investment strategy, this article has hopefully illustrated the undervalued nature of shares of Las Vegas Sands and has provided a few alternatives in how to capitalize on this mispricing offered to us by the market today.
7.0 Author Disclosures
Information regarding the company’s background, ownership, and financial performance is based on information provided through the company’s website, SEC filings, and information available on GuruFocus.
I am long LVS through my holdings of the company’s common shares and am actively looking to acquire additional shares upon any continued weakness in the company’s share price.
