Tuesday, November 9, 2010

3 Cases for LVS

There is only one word that can describe the price movement of stock of Las Vegas Sands (LVS), a casino property developer and operator: H-O-T.  The stock price went up by a whopping 200% in the last 12 months, compared to about 12% of the S&P 500 Index.

1. Singapore
The super growth lies with Singapore, a prominent tourism, finance and trade center in Asia that attracts millions of tourists each year.

LVS's owned Marina Bay Sands (MBS), cranked out an EBITDA of $241.6 million in 3rd quarter, 2010 after opening just 6 months ago, about 4 times the EBITDA of LVS’s base in Las Vegas. This is just the beginning. Hongkong-based investment company, CLSA offered very bullish forecast on the growth of the Singapore gaming industry. The industry is expected to grow to a $6 billion industry in 2011 and $9 billion by 2013. Citigroup analysts offered a less upbeat, expecting a $4.5 billion industry in 2011. Currently LVS carries about 34% of the market share.

Between the lower and upper range of estimated industry growth, LVS can take in a revenue between $1.53 billion and $2.04 billion with a midpoint of $1.785 billion in year 2011. LVS is expected to soon take the market share up to about 40%, drawing closer to the only competitor in Singapore, Genting. Given this market share, between the lower and upper range of estimated industry growth, LVS can take in a revenue between $1.8 billion and $2.4 billion with a midpoint of $2.1 billion in year 2011. To put these numbers in context, the old base of LVS in Las Vegas has an annualized revenue of $1.19 billion in 2010. Even without any growth, MBS, just by operating the full year should have about $1.4 billion in revenue (the annualized revenue of MBS in 2010).

2. Macao

Also contributing to significant growth of LVS for years to come is Macao. LVS owns 3 casino properties in Macao, the largest gaming industry in the world now. LVS took in an EBITDA of $334.6 million, about 6 times the EBITDA of LVS’s properties in Las Vegas. LVS’s properties in Macao brought in $3.02 billion in revenue as of the end of 3rd quarter, 2010. Year to date, Macao gaming industry reaped in a total of $19 billion revenue. On a very conservative side, suppose the remaining 2 months have the same results as October (ignoring the positive effects of holiday seasons on the industry), Macao could be a $24billion revenue industry. The industry is expected to grow 30% in the region next year, thus taking the revenue over $30 billion. LVS currently has about 18-19.8% of the market share which translates into $5.4 -6.17 billion revenue in 2011, 34-53% higher than the annualized revenue of LVS in Macao in 2010. This is not the end of the story. LVS is still expanding its business in Macao. One of its new properties in Cotai Strip is expected to open in the third quarter, 2011. [Click on the graphic to enlarge the view]

Source: Gaming Inspection and Coordinaton Bureau of Macao

3. Las Vegas and Economic Recovery

While growth stories in Singapore and Macao go on and on and they will carry a huge chunk of LVS in the near future, LVS’s properties in Las Vegas will benefit from the economic recovery of the United States. While the recovery is slow and uneven, it is on the right track.

In sum, Las Vegas at its current price $52 is 53.6 times and 31.7 times its estimated EPS for 2010 and 2011 respectively. With an expected growth rate between 30-50%, the valuation is attractive for a super-growth stock. In 2007, with Macao business just beginning and without Singapore business, the stock of LVS reached as high as $150. With the growth prospect in Macao and Singapore, it is foreseeable to see the stock price go over $100 in the next 6-12 months.

One caveat lies with the short-term risks of possible correction as the stock has gone straight up almost every other day. Entry at a short-term correction of 10-15% may be a better risk/reward tradeoff.

Disclaimer: This blog is for general information purpose only. Stocks/financial instruments mentioned in this blog are not to be taken as investment advice/recommendation. Readers must consult their own financial advisors and/or consider their own risk/reward profile before making investment/trading decisions. The blog author is not liable for any investment/trading decisions of readers should readers decide to base the decisions on information provided by the blog.

Disclosure: The blog author does not own LVS in her personal account as of November 9, 2010

Friday, November 5, 2010

The Demise of Cable Television?

From "Cable Subscribers Flee, But Is Internet to Blame?"

"..........TV subscribers are ditching their cable companies at an ever faster rate in the past few months, and many of them aren't signing up with a satellite or phone competitor instead.

Their willingness to simply go without pay television could be a sign that Internet TV services such as Netflix and Hulu are finally starting to entice people to cancel cable, though company executives say the weak economy and housing market are to blame............
Third-quarter results reported this week by major cable and satellite TV companies show major losses, but don't settle the question of what's causing them.

If "cord-cutting" in favor of Internet video is finally taking hold, that has wide-ranging implications. Consumers who use the Internet to get their movies and TV shows bypass not just the cable companies, but the cable networks that produce the content. The move could have the same disruptive effect on the TV and movie industries as digital downloads have already had on music........................................"
Is Internet to Blame?

This trend coincides with a very sluggish economy, thus rendering it difficult to pinpoint the cause of "cord cutting". Are tv subscribers turning to internet video streaming or they simply can't afford cable TV bills these days.

Time Warner Cable Inc.'s chief operating officer, Landel Hobbs, said the company does not see evidence of people dropping cable in favor of the Internet. First, the biggest subscriber losses have been occuring for people who do not already have high-speed internet without which online video streaming is impossible. They either have switched to satellite or giving up paid TV channels. Second, college students who are viewed as more high-tech savvy, and more inclined to switch to online TV, have not shown a drop rate that is out of line with previous years.

Meanwhile, there are a couple of hurdles to overcome before online video streaming can take over cable TV/satellite like cell phones taking over landlines 5-6 years ago. First, hooking up computer or game console or other devices to get internet video content streaming as easily as a switch of a button on the remote control may seem like a piece of cake to high-tech savvy people but not others. Second, or more importantly, TV fans find content on internet very limited. For example, there is not a lot of life sports on TV yet. Content providers like Walt Disney and Newscorp currently make billions of dollar from cable TV. 6 content providers carry 85% of the content viewed by the nation. They are unlikely to give it up easily to internet providers who are unlikely to pay the same amount of fees. There will be a battle between content provider and internet providers. Until they iron out these differences, cable TV may catch a breather.

However, I think this will not be a long breather.

Related tickers: CVC, CMCSA, DIS, NWC,NFLX

Thursday, November 4, 2010

Some Statistics on Midterm Election Effects

From the article "Midterm Election Impact on Stock" in huffington.com

Year 2011 is the year before a president faces re-election, the year after a president has lost control of Congress and the second year of a fragile economic expansion.

Since 1945, the Dow Jones industrial average has gained an average of 19 percent the year before a sitting president runs. That's more than double the 7.9 percent average annual gain during the same period. If you take out the 10 years when the president was running, the average gain drops to only 5.8 percent...................................................

Presidents whose party controlled both houses of Congress have lost at least one chamber five times in the past 80 years. Stock returns in the following year haven't followed a pattern. The Dow plunged 53 percent in 1931 and gained 34 percent in 1995. Gains in the other three years ranged from 2.2 percent to 20.8 percent. That makes it impossible to forecast what will happen this time. The change in Congress in 1931 came during the Great Depression, while the 1995 transition came during the first part of the Internet boom. The next Congress faces a fragile economic period, which could mean that the market offers another single-digit gain like this year.

Gridlock hasn't been great for stocks. Since 1945, the Standard and Poor's 500 index has gained 4 percent in years when Congress was split between parties. It increased 8 percent when Congress was controlled by one party and the White House another. When a single party was in control of Washington, the index gained an average of 11 percent.
.....................Stocks have been in a bull market for 18 months, pushing the Dow up 70 percent since it hit a 12-year low in March 2009. That gain is larger than normal but isn't surprising considering that the rally followed the worst financial crisis since the Great Depression. During slow recoveries like this one, bull markets typically last 30 months and bring gains of 44 percent overall, according to Ned Davis Research.
According to Clearbridgeadvisors.com,
"......Subsequent to 17 mid-term elections since 1942, the S&P 500 appreciated 17 times (100% batting average) over the next 200 days, with the average return being 18.3%. The low percentage gain (+3.9%) was in 1946, just after World War II ended and deflation fears were in vogue, and more recently the 6.1% gain for the S&P 500 after the 2006 mid-term elections....."
In the same report, MKM Partners and the Leuthold Group both suggest bull market ahead. MKM Partners pointed out that stock valuation are more attraction than bond. The earning yield of companies , which is earnings divided by stock price is 3 percent higher than bond yield, the highest since 1951, the administration of President Truman. The Leuthold Group, by studying the relationship between P/E during the midterm election and the following 10-year stock return, suggests that the 10-year-annualized return following 2010 election will be 11%.

All in all, without digging into the "Why's", descriptive statistics generally lean toward a bull market following this midterm election.