Investing Is Not About Gambling

Author's Avatar
Nov 25, 2014

In this article, let's take a look at Las Vegas Sands Corp. (LVS, Financial), a $51.14 billion market cap company, which operates casinos in Las Vegas; Macau, China; Bethlehem, Pennsylvania, and Singapore.

Sands China

Sands China generated about two-thirds of 2013 revenues and 75% of its cash flow from the mass market. With a smart move made from Sands founder and CEO in the Cotai Strip in the 2000s and subsequently on reclaimed land. The company controls more than 50% of the gaming tables on the Cotai Strip. We believe the firm will continue increasing its market share in Macau. Next year, it will open the under-construction Parisian, which will benefit the company.

Other regions

The firm has megaresorts in other regions, such as Las Vegas, Macau, and Singapore. Further, there are markets that are going to receive licenses in order to legalize casino gambling. We are talking about Japan, Taiwan and South Korea. If this happens, they are going to consider proven operators, and Sands will be in a good position to offer its services.

Revenues, margins and profitability

Looking at profitability, revenues declined by 1.0% but earnings per share increased in the most recent quarter compared to the same quarter a year ago ($0.83 vs $0.76). During the past fiscal year, the company increased its bottom line. It earned $2.79 versus $1.85 in the previous year. This year, Wall Street expects an improvement in earnings ($3.53 versus $2.79).

Finally, let´s compare the best measure of performance for a firm's management: the return on equity. The ROE is useful for comparing the profitability of a company to that of other firms in the same industry.

Ticker Company ROE (%)
LVS Las Vegas Sands 36.42
IGT International GameTechnology 21.24
PNK Pinnacle Entertainment Inc 19.29
 Industry Median 7.48

The company has a current ROE of 36.42% which is higher than the industry median and the ones exhibit by International Game Technology (IGT, Financial) and Pinnacle Entertainment (PNK, Financial).In general, analysts consider ROE ratios in the 15-20% range as representing attractive levels for investment. It is very important to understand this metric before investing, and it is important to look at the trend in ROE over time.

03May20171247471493833667.png

Relative Valuation

In terms of valuation, the stock sells at a trailing P/E of 19.3x, trading at a discount compared to an average of 29.9x for the industry. To use another metric, its price-to-book ratio of 7.09x indicates a premiumversus the industry average of 2.48x while the price-to-sales ratio of 3.5x is above the industry average of 1.89x.

As we can see in the next chart, the stock price has an upward trend in the five-year period. If you had invested $10,000 five years ago, today you could have $41,372, which represents a 32.8% compound annual growth rate (CAGR), which we consider it tremendously attractive.

03May20171247471493833667.png

Final comment

We believe the company will continue its leadership position in Macau. Further its dominant position in Singapore, where it has one of two licenses to operate; as well as in China where it has one of six licenses to operate.

The PE relative valuation and the return on equity that significantly exceeds the industry average make me feel bullish on this stock.

Hedge fund gurus like Louis Moore Bacon (Trades, Portfolio), Bill Nygren (Trades, Portfolio), Joel Greenblatt (Trades, Portfolio), Paul Tudor Jones (Trades, Portfolio), Jim Simons (Trades, Portfolio), Chris Davis (Trades, Portfolio), Mario Gabelli (Trades, Portfolio) and Frank Sands (Trades, Portfolio) added this stock to their portfolios in the third quarter of 2014.

Disclosure: Omar Venerio holds no position in any stocks mentioned