It's quite possible that entertainment spending in Las Vegas and Macau China will thrive and grow regardless of whether the market continues its decline into recession. Yesterday, the Dow dropped 470 points to a 14-month low, a full day of trading after an interest rate hike by the Federal Reserve, which also signaled two more hikes next year. The market must now take its medicine as money tightens.
For Las Vegas Sands (LVS, Financial), this is the lowest level its stock has seen since the beginning of 2017. In fact, the company Sheldon Anderson built has teetered back and forth financially over the last five years, hinting at growth and then pulling back.
Financial snapshot
Last week, money manager Jim Chanos (Trades, Portfolio) issued a warning on Las Vegas Sands and Wynn Resorts pointing to the potential that the casino companies could be a casualty of an escalation in the U.S.-China trade war. Chanos is short both Wynn and Las Vegas Sands, but long Hong Kong-based Melco Resorts & Entertainment (MLCO).
To be fair, the short position couldn't amount to much, as his fund Kynikos manages less than $200 million, and if the trade war gets put to bed, he could flip to the long side. Investors should remember that Las Vegas Sands takes in 90% of its Ebita from Asia. Yes, the impact of a trade war could be very, very bad for Sands.
However, from an economic standpoint, it is really hard to see any upside with betting against Las Vegas Sands. The company is the world's largest resort operator and generates a massive amount of cash across an impressive lineup of properties. Yet, when compared to its closest competitor, MGM Resorts (MGM), it's obvious that the market puts a premium on Sands value. MGM as an impressive lineup of properties as well, and while its financials are not as strong or stable as Sands, its price multiples are much lower than Sands.
Las Vegas Sands (TTM)
Revenue: $13.8 billion
Income: $3.7 billion
Cash Flow: $4.7 billion
CapEx: $868 million
Cash: $4.8 billion
Debt: $11.9 billion
Ratios
P/E: 10.7x
P/B: 5.8x
P/S: 2.9x
MGM Resorts (TTM)
Revenue: $11.3 billion
Income: $1.6 billion
Cash Flow: $2.1 billion
CapEx: $1.7 billion
Cash: $1.3 billion
Debt: $14.7 billion
Ratios
P/E: 7.6x
P/B: 1.9x
P/S: 1.2x
Betting big on Asia has meant bigger profits even with tougher regulations, which is why Chanos may be right if trade talks continue to heat up between the U.S. and China. People mistakenly believe that the buyer has the power in that relationship. China doesn't need the U.S. as much as we need them; however, the Chinese economy isn't growing like it once did and, in two years when the new election cycle starts, the rhetoric could change.
By then, the stock market may have already bottomed. Of course, the last time we had a recessionary market Las Vegas Sands traded below $5 a share. That would be a big win for Chanos and a big hit for investors if the shares were to get anywhere close to that level again.
Valuation
Historically, Las Vegas Sands has been priced around 23x earnings, 7x book and 4x sales. Currently, the stock is valued at much lower multiples. With the company expected to post $3.50 a share in 2019, getting back to a more normalized valuation would price the stock between $60 and $80 per share. It's also likely that revenue from Macau will continue to grow as long as Las Vegas Sands can operate in the country without penalty, hence it wouldn't suffer the drastic downturn it experienced in 2008 and 2009.
Only time will tell if Chanos is right about the trade war and whether or not the downtrend spirals into something more than just a bear market. In the meantime, with the stock just a few points off its year low and paying a 6% dividend, investors can start building a position.
Disclosure: I am not long/short Las Vegas Sands.
