I’m a big fan of Las Vegas. I try to visit at least once a year to try my luck at the tables (I leave the club-hopping to the socialites).
I’m also an advocate of gaming stocks. In fact, I spent over a year writing a regular monthly feature for Casino Player Magazine called the “The Gaming Investor.” That column enabled me to follow every bend and twist in this fascinating industry. This was back in 2007, when casino resort owners, slot vendors, and racetrack operators were filled with promise.
Unfortunately, the gaming sector was obliterated by the recession of 2008 and 2009. After years of stellar earnings and scorching stock gains, investors fled when consumer spending went cold and business conventions stayed closer to home.[ad#Google Adsense 336×280-IA]Las Vegas is a poster child for the excesses of the real estate bubble.
Land that was bid up to astronomical levels now sits vacant, strewn with half-finished projects that were abandoned when funding dried up.
Overcapacity from the construction boom has made life difficult, even for experienced operators.
Just look at Las Vegas Sands (NYSE: LVS), which owns the glitzy Venetian and Palazzo mega-resorts and is also the world’s largest casino operator by market volume.
The shares ran up to the exorbitant price of $148 in October 2007 amid unbridled optimism.
But they plummeted 99% over the next 18 months.
By March 2009, you could pick up shares for about the price of a cup of coffee — $1.38 per share.
Clearly, the market overcorrected to the downside. The stock has since clawed its way back to $57. Bargain hunters who invested just $1,380 to scoop up 1,000 shares at the bottom are now sitting on a cool $57,000.
One of the quickest ways to gauge the health of a resort is revenues per available room, a metric that reflects both occupancy and pricing. If the resort is full (and not marked down just to fill beds), then demand is healthy.
Keep in mind, those hotel visitors don’t just sit in their rooms. They will book show tickets, reserve time at the spa, have a few meals and spend some time rolling the dice.
Looking at the latest numbers from the quarter ended Dec. 30, 2011, Las Vegas Sands’ Venetian and Palazzo properties reported revenue that increased 9.3% percent to $339.5 million, compared with $310.6 million in the fourth quarter of 2010. In its earnings report, the company cited a bump up in meeting and convention business and a 13% increase in revenue per available room, which hit $174. That’s down from $244 at the end of 2007 before the bottom fell out of the market, but it’s a substantial improvement from $149 at the beginning of 2011.
But forget Vegas, THIS is where the growth is…
That’s all nice and everything, but the real reason I like this stock has nothing to do with the Las Vegas properties. In fact, Sin City only accounts for about 10% of the company’s profits. Most of it comes from Macau, a vibrant gaming enclave and tourist destination a few miles from Hong Kong in the South China Sea.
For years, Macau was referred to as the Las Vegas of China. But that’s not even a fair comparison any more — Macau’s gaming revenue overtook Las Vegas in 2006.
Macau is the only venue in town (gaming on the mainland is restricted). So the region draws heavily from a population of 1.3 billion people that live within a short three-hour flight.
Las Vegas Sands’ Venetian Macao resort has been a hit with both high-rollers and everyday players since it opened. Even in the first three months of 2009, when Macau’s total visitor count dropped almost 10%, the Venetian Macau saw a 14% increase (6 million visitors). This glamorous resort, which anchors the famed Cotai Strip, almost prints cash.
Las Vegas Sands has two other properties nearby, the premium Four Seasons Resort and the Sands Macau (the first American resort to crack this market). The newest addition, slated to open in April, is the Sands Cotai Central — a 5,800 room resort with every amenity imaginable to coax Macau’s day-trippers into spending more time.
But wait, there’s more…
Remarkably, though, Las Vegas Sands’ flagship property isn’t located in China or the United States. It’s the Marina Bay Sands in Singapore, where the company holds one of just two coveted casino licenses. This resort pumped out a colossal $426 million in EBITDA last quarter, with an unheard-of margin of 52.9% (many resorts would be happy with 30%).
All in all, the company posted fourth-quarter 2011 revenue of $2.5 billion, the highest in its history. I’d say the tables have turned for the better in the gaming world, particularly for Las Vegas Sands.
Risks to Consider: Las Vegas Sands depends heavily on Chinese visitors to Macau, and an economic downturn could lead to quieter tables and slots. An ongoing federal corruption probe could also be a distraction. There are allegations that senior company officials greased a few palms to expedite condo sales. But the company flatly denies any wrongdoing. And in any case, the probe isn’t really as serious as it sounds. According to Morningstar, similar infractions have typically resulted in nothing more than slap-on-the-wrist fines.
Action to Take –> Las Vegas Sands (NYSE: LVS) has a strong foothold in three of the world’s top gaming markets. Best-in-class property margins indicate the company is generating more cash from its resorts than rivals.
I like the focus on Macau’s mass-market gamblers. This segment is more consistent and more profitable than VIP play, as well as more exposed to rising discretionary income among China’s middle class. And with a new property about to open, profits are projected to climb 40% or more annually over the next five years, which makes the shares attractively valued at just 18 times earnings.
This is a volatile stock best suited to aggressive investors who can catch it on a pullback, but I still think it’s headed in the right direction, regardless of any swings it may experience.
— Nathan Slaughter
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