The neon lights aren’t the only things illuminating on the Vegas Strip - so are
the casino operators’ bottom line. According to the Nevada State Gaming Control
Board, total gaming revenue on the strip is up nearly 21% for the three months
ending in February 2006. In turn, casino companies like Las Vegas Sands
(NYSE: LVS) are now hitting the jackpot.
Las Vegas Sands has been around since 1988, but really made its mark in 1999
with the opening of the Venetian Resort Hotel Casino in Vegas. Since then, this
uniquely-themed casino and resort has become a “must-see” destination. That’s
apparent from its average occupancy rate of 98%. It’s also managing to fill
those rooms at an average rate of $225 per night. Compare that to the Vegas
norm, where $100 per night rooms are only 89% full.
Another foundation of Las Vegas Sands is the Sands Expo Center, one of the
largest overal trade show and convention facilities in the country. No doubt,
the convenience of being located next door to the convention center is one
reason why the resort boasts such high occupancy rates at above-market prices.
The Palazzo Resort Hotel Casino, a sister property to The Venetian, will open in
summer 2007 as an ideal setting for high-end gaming.
The future, though, lies 7,300 miles away in Macao, a small territory on the
southern coast of China that belonged to Portugal until 1999 and the only
location in China that allows casino gaming. Around 76% of China’s 1.3 billion
people live within a threehour flight of Macao, and tourism there is booming. So
having the first Las Vegas style casino there is certainly a plus.
The company opened the Sands Macao Casino in 2004. It’s also building the
Venetian Macau Casino Resort, which should open in the summer of 2007, and is
developing six other properties there as well.
China’s growth potential is in the numbers. During its first full year of
operations in 2005, the Sands in Macao earned nearly $900 million. Compare that
figure to the $784 million for the Vegas Sands, and the importance of the Macao
market is clear.
And the company is taking advantage of having a foothold in both Vegas and
China, cross-marketing in Macau while also developing Asian-focused amenities
aimed at Vegas-bound Asian high rollers.
Las Vegas Sands isn’t stopping with China, though. The Singapore government is
expected to award a license for a large, integrated casino and resort in
mid-2006 and Las Vegas Sands aims to win it. Las Vegas Sands is also exploring
possibilities in the United Kingdom.
Las Vegas Sands’ global growth strategy, coupled with its strong fundamentals,
suggests that what happens in Vegas doesn’t necessarily stay in Vegas.
Las Vegas Sands’ income statement is an ace in the hole. Earnings have ramped up
fast, with four of the past five quarters seeing triple digit gains. Most
recently, the company grew its bottom-line by 28% over the prior year while
sales grew by 27%. On an annual basis, 2006 earnings are expected to be up 19%
over 2005’s $1.07.
Profitability is also improving. Operating and profit margins have been
expanding year-over-year for two straight quarters.
It’s difficult to calculate a dividend discount model valuation on Las Vegas
Sands’ shares, because, having come public in December 2004, there’s not enough
trading data to calculate a meaningful beta. And beta, of course, is an
important component to the discount rate. So we plugged the industry average
beta, and to determine a worst case scenario, the industry high beta, into the
dividend discount model and found the stock was either moderately or grossly
overvalued.
Las Vegas Sands’ shares completed a double bottom base in November 2005, and
have barely looked back. The stock bounced off its 50- and 200-day moving
averages twice - once in December and again in January - before surging over 50%
over the following nine weeks. In early March, the stock pulled back to its
50-day moving average again before bouncing another 30% to a new all-time high.
The ideal time to buy the stock was as it traded above its prior high of $58.03
on heavy volume, or within 5% of that level. Below $61 would be a low-risk
entry.
