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Las Vegas Sands (LVS) - Too Big to Fail?

September 03, 2009 | About:
Dividends4Life

Trader Mark

4 followers
I was a long term bear on US casinos in 2007, more on the fact that I thought Las Vegas exemplified all the things of American consumerism that were going to change - namely excess. [Oct 3, 2007: A Top in Casino Names? Wynn and Las Vegas Sands] [Nov 1, 2007: China Can't Save Las Vegas Sands - It's Getting Crox'd] I was not quite as up to speed on the extreme debt exposure of MGM Grand (MGM) and Las Vegas Sands (LVS) in particular, which served to threaten bankruptcy at a point. [Oct 28, 2008: Las Vegas Sands is now a $4 Stock] At their worst these stocks fell some 98%+ from peak to trough but it is becoming clear that these two have become "too big to fail"... with Las Vegas Sands ahead of pace of MGM Grand in fixing its situation. I was under the mistaken assumption that banks would come collect their collateral but with zero major homebuilderbankruptcies, only 1 major public commercial REIT, and zero Las Vegas casinos it seems leniency is the new way of the US world.

So while I still think Las Vegas as a tourist attraction, will take much time to get back to "normal" and the casinos are effectively handing away rooms (I literally saw a deal from Burbank, CA to Wynn Resort ON PRIVATE JET including HOTEL for just over $500), survival no longer seems to be as much of an issue. [Dec 23, 2008: Wynn Encore Casino Struggling to Fill Rooms During Launch] If in the greatest collapse of housing and commercial real estate almost none of our public companies in those sectors go bankrupt it appears "creative destruction" is something from a bygone era.

In this space specifically we've noted some amendments of credit terms [Apr 22, 2009: Wynn Resorts, LasVegas Sands Amend Credit Terms] and it continues almost monthly. Yesterday, LVS announced an issuementof bonds which, while dilutive to current shareholders, continues to "push off any date of reckoning" on their balance sheet.
Las Vegas Sands Corp (LVS), one of the world's largest casino companies, has secured commitments to raise up to $600 million through the sale of exchangeable bonds, the company said on Wednesday.The bonds will have to be swapped for common shares of the company's Macau unit after the unit's pending initial public offering on the Hong Kong Stock Exchange.The sale is part of highly leveraged Las Vegas Sands' efforts to boost its financial strength, the company said. It recently amended its $3.3 billion Macau credit facility and plans to take one of its subsidiaries public.The financing will prevent looming U.S. debt covenant breaks in the third and fourth quarter, Bernstein Research analyst Janet Brashear said in a research note. "Without this stop-gap measure, we had projected that LVS would have approximately $100 million too much debt at September 30 and approximately $400 million too much debt at December 31," she wrote."Completion of the Hong Kong IPO is the last hurdle, but today's development is material as it probably further reduces near-term covenant risk," Bank of America analyst Shaun Kelley said in a research note.The company reported not very stellar results in late July and has rallied 35% since... near term results don't seem to matter.
[Jul 31, 2009: Las Vegas Sands - Disappoints Again] So with that said, one cannot be as bearish as before on the space and in fact might see long term promise as long as these companies can continuously kick the can and convert debt into equity. While that is not a great thing for equity holders, we have come out of an era where dilution in return for survival has seen enormous stock appreciation. See the REIT space. One could apply the same top line theory to the REITs because it appears from this seat that what is happening in that space if the public REITs are going to have a huge advantage over the private ones, as the public entities can float shares any time they are in trouble and apparently there is an insatiable demand to buy REIT stocks by the investment public. This gives the public REIT an out that the private ones do not...

I expect continued volatility in the space, but Las Vegas Sands (LVS) is looking more interesting for the long term. However, after such a run - I'd like to revisit it when (if) the stock market pulls back and we see a single digit price level again. Putting a valuation on this name is difficult - all I know is it is now appears in America, failure is almost never an option. Just don't call us Japan.

Trader Mark

http://www.fundmymutualfund.com

Rating: 3.4/5 (16 votes)

Comments

vgm
Vgm - 4 years ago
Thanks Mark.

For what it's worth, Steve Mandel at Lone Pine has sold out of a large position (ca. $450 million) in LVS.

http://www.nasdaq.com/asp/holdings.asp?FormType=Institutional&symbol=MPEL&selected=MPEL

And he bought into a competitor in the emerging Macau market, Melco Crown (MPEL) - although a smaller position (ca. $100 million).

http://www.nasdaq.com/asp/holdings.asp?FormType=Institutional&symbol=MPEL&selected=MPEL

On a recent Gurufocus video, Seth Klarman made a comment to the effect that "...if you are buying, and Steve Mandel at Lone Pine is selling, you should be cautious, since Steve is an outstanding analyst".

vgm
Neriek
Neriek - 4 years ago
This is a poor article, full of superficial macro generalities and ignorant of LVS's actual business.

Forget Las Vegas and the US-centric political mindset. LVS is Asia's leading gaming company, with the best properties in Macau and Singapore - a regulated duopoloy market. Within one year 85% of LVS earnings will come from Asia, with the majority from Singapore which is set to become the most profitable casino in the world due to lower gaming taxes.

The analysts covering LVS are now scrambling to upgrade, having been rightly derided by Sheldon Adelson for their negative pieces. Most LVS analysts are based in New York without much idea of Asia, and some of their forecasts, prepared in Oct '08 and during the March '09 low, are way-off compared to what their peers based in Singapore and HK have to say about the prospects for Singapore and Macau gaming. For example, many analysts are projecting US$300-600mn for LVS Singapore EBITDAR vs LVS's own forecast of US$1.2bn, or estimates of US$1bn or so for LVS's smaller Singapore competitor (Resorts World) according to CLSA - the leading institutional broker in Asia.

Macau alone is likely to generate US$500m in net income and be valued at US$5bn+ in equity value at IPO. In a few years, or less, LVS will likely be making US$2bn in annual net income, meaning the stock may be at 5x PE. So just wait a little and you'll soon enough see the analysts hyping the stock to $50+ (again).

If Adelson wanted to immediately reduce gearing at LVS, he could do so easily - by issuing equity at the LVS listco level. But thankfully Adelson has ignored the analyst squeals for dilution as he does not want to reduce his stake, and he knows the banks are on board anyway. It doesn't help the share price to have hysterical headlines about LVS's gearing, but it does help longer-term returns for people buying LVS now.

Ultimately, there are many willing commentators on LVS but very few people who have actually done serious financial homework. Not surprisingly, the average holding period on the stock right now is a mere 9 days - which is actually up from 5 days a couple of months ago, but still ridiculous. The stock is a plaything of daytraders, many of whom are short and continue to lose a lot of money. And yet short interest is still a massive 21% of free-float, all of which will need to be bought back eventually.

There is still plenty more upside until Singapore opens, the average holding period rises, short interest falls significantly and the analysts turn uniformly bullish. By then of course LVS will be $40-50+.
Neriek
Neriek - 4 years ago
This is a poor article, full of superficial macro generalities and ignorant of LVS's actual business.

Forget Las Vegas and the US-centric political mindset. LVS is Asia's leading gaming company, with the best properties in Macau and Singapore - a regulated duopoloy market. Within one year 85% of LVS earnings will come from Asia, with the majority from Singapore which is set to become the most profitable casino in the world due to lower gaming taxes.

The analysts covering LVS are now scrambling to upgrade, having been rightly derided by Sheldon Adelson for their negative pieces. Most LVS analysts are based in New York without much idea of Asia, and some of their forecasts, prepared in Oct '08 and during the March '09 low, are way-off compared to what their peers based in Singapore and HK have to say about the prospects for Singapore and Macau gaming. For example, many analysts are projecting US$300-600mn for LVS Singapore EBITDAR vs LVS's own forecast of US$1.2bn, or estimates of US$1bn or so for LVS's smaller Singapore competitor (Resorts World) according to CLSA - the leading institutional broker in Asia.

Macau alone is likely to generate US$500m in net income and be valued at US$5bn+ in equity value at IPO. In a few years, or less, LVS will likely be making US$2bn in annual net income, meaning the stock may be at 5x PE. So just wait a little and you'll soon enough see the analysts hyping the stock to $50+ (again).

If Adelson wanted to immediately reduce gearing at LVS, he could do so easily - by issuing equity at the LVS listco level. But thankfully Adelson has ignored the analyst squeals for dilution as he does not want to reduce his stake, and he knows the banks are on board anyway. It doesn't help the share price to have hysterical headlines about LVS's gearing, but it does help longer-term returns for people buying LVS now.

Ultimately, there are many willing commentators on LVS but very few people who have actually done serious financial homework. Not surprisingly, the average holding period on the stock right now is a mere 9 days - which is actually up from 5 days a couple of months ago, but still ridiculous. The stock is a plaything of daytraders, many of whom are short and continue to lose a lot of money. And yet short interest is still a massive 21% of free-float, all of which will need to be bought back eventually.

There is still plenty more upside until Singapore opens, the average holding period rises, short interest falls significantly and the analysts turn uniformly bullish. By then of course LVS will be $40-50+.

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