The Depth Report - Las Vegas Sands (LVS) - Update
On April 27, 2020, we published a piece on Las Vegas Sands. The stock was at $43 and we recommended buying it. On June 10th, we sold the position at $52. The stock had moved over 20% in under a month and a half, and we were concerned about an extension of the coronavirus lock-downs.
As of this writing, the stock has traded back down into the $43 range, and both Singapore and Macao have started to reopen. For anyone who missed this pick the first time around, we think you’re getting a great second chance now.
In the original writeup linked above, we gave a description of the company business and recommend that piece for investors who wish to familiarize themselves with LVS’ assets. We’ll focus on the change in the business landscape since then.
Macao suspended casino operations in February. While the casinos had reopened with limited capacity when we published our April writeup, Macao had closed the border with Guangdong Province and Hong Kong, and was requiring a 14-day quarantine for arrivals from Taiwan and mainland China. These restrictions were extended until July 14th, and as a result of this, Macao gross gaming revenue was down 97% in June. With many of the travel restrictions starting to be lifted, and with June business down 97%, the sequential numbers will start to improve this month. One encouraging piece of data is that 25,000 casino workers for Sands China and SJM Holdings have been tested for Covid-19 with all tests coming back negative.
The situation at the Marina Bay Sands in Singapore is similar. That facility was closed in April, and the casino opened on July 1 at 25% of capacity. Like Macao, Singapore is going from closed and approximately $0 in revenue to open. This means the sequential numbers will improve starting this month.
Las Vegas casinos were closed for over two months, and began reopening June 4th. Sands’ Venetian facility will go from closed to open meaning sequential revenue will improve; however, last week, Rob Goldstein, LVS’ Chief Operating Officer, warned investors that Las Vegas would take a long time to recover. While Macao tourism is driven by gambling, much of the business in Las Vegas is driven by conventions and huge crowded parties that will be closed for the foreseeable future. Yesterday, the Consumer Technology Association cancelled its 2021 CES event. It’s the biggest convention in the world, and next year, it’s going to be virtual instead of hosted in Las Vegas. Goldstein’s warning that Vegas will take a long time to come back should be taken seriously. Fortunately, Las Vegas only represents 10% of company EBITDA.
Last week, the company gave an update on cash and available liquidity. Las Vegas Sands has enough liquidity to last another 18 months, or until the end of 2021, in a near zero revenue environment. Given that all casinos are currently open and starting to ramp up operations, we don’t expect the company to have to look for additional sources of cash. The above liquidity numbers include continuing growth capital expenditures in both Macao and Singapore. That information can be found on page 5 of the second quarter earnings presentation located here.
The Opportunity Now:
As we’ve watched company announcements during the various coronavirus shut-downs, we’ve noticed that investors are responding to sequential improvements in results. Investors seem to be extrapolating that companies that are improving will return to full health. Last week, LVS announced earnings for the quarter ended June 30th. Since then, the casinos that make up 90% of operating income have gone from (essentially) closed to open. The sequential numbers have to improve. We also reiterate our belief that the gambling business has been part of human society for thousands of years. At some point, life will return to something resembling normal, and people will return to travel and other pleasurable activities including gambling.
In our original piece, we summed up the valuation proposition as follows: Last year, LVS earned $3.26, and looked like it was heading for something around $3.70 in 2020 prior to the coronavirus shut-downs. The stock tended to trade around 20 times earnings due to both the quality of the business and the high dividend ($3.16 annualized prior to recent suspension). Let’s say it takes two years to get back to “normal” and in that time, Sands completes the capital expenditure projects discussed above and restores the dividend. 20 times $3.70 gets a stock price of $74 and a dividend yield of 4.3%. Investors at that point would start to benefit from growth due to the completion of construction in Macao and Singapore, and if earnings projections trend towards $4.00 - $4.50 range, we could see a stock price in the $80 - $90 range. That’s roughly double the current $43 price.
Rob Goldstein’s caution on the Las Vegas market is something we take seriously. That business had been doing around $335MM in operating income. If that gets cut in half, it would reduce earnings by about $.20 a share. If we apply the same 20x multiple we use above, that would reduce the valuation target by $4. So, we’d lower our valuation target from the previous $80 - $90 range to $76 - $86. Given the current $43 stock price and the guaranteed sequential business improvement, we think that’s enough of a margin of safety to re-enter the position.