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

No comments: