In this article, let's take a look at Las Vegas Sands Corp. (LVS, Financial), a $43.72 billion market cap company that operates casinos in Las Vegas; Macau, China; Bethlehem, Pennsylvania, and Singapore.
Key market
Sands China generates about 65% of the company's revenue in 2013, which means that it is a key market where the firm is well positioned, principally for its operations on the Cotai Strip in Macau.
About 75% of its cash flow came from the mass market, which we consider a key driver for future growth. On the other hand, the VIP market has been shocked due to gamblers attitude of avoiding the Macau gambling hub, when the Chinese government began its anti-corruption measures. Moreover, the first segment offers higher margins compared with the VIP segment.
Expanding operations
The company has launched resorts in Las Vegas, Macau and Singapore. In the latter, it opened the Marina Bay Sands, with relatively success. Marina Bay has lower taxes than in Macau, which obviously impact in a higher EBITDA. Taxes are almost than those charged in Macau, which are 39% of gaming revenue.
In order to expand its operations, in 2016 the company will open the under-construction Parisian to become a strong player in Cotai. Further, it has one of the two licensed casinos in Singapore. So there are high barriers to entry for competitors, and this situation will remain until at least 2018.
Revenues, margins and profitability
Looking at profitability, revenues declined by 6.56%, but earnings per share increased in the fourth quarter compared to the same quarter a year ago ($0.90 vs. $0.70). The net income increased by 24.9% when compared to the same quarter one year prior to $721.31 million.
The gross profit margin is good, at about 48%, and it has increased from the same quarter the year prior. The net profit margin of 21.12% is ranked higher than 92% of the 1,017 companies in the Global Resorts & Casinos industry.
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 | 38.75 |
| IGT | International GameTechnology | 17.63 |
| BYI | Bally Technologies Inc. | 45.96 |
| PNK | Pinnacle Entertainment | 17.78 |
| BYD | Boyd Gaming Corporation | -11.44 |
| Â | Industry Median | 7.21 |
The company has a current ROE of 38.75% which is higher than its peers. Also, it is higher than the ones exhibit by International Game Technology (IGT, Financial), Pinnacle Entertainment (PNK, Financial) and Boyd Gaming (BYD, Financial). In general, analysts consider ROE ratios in the 15-20% range as representing attractive levels for investment. So for investors looking those levels or more, Bally Technologies (BYI, Financial) could be the option. It is very important to understand this metric before investing, and it is important to look at the trend in ROE over time.
| Year | ROE (%) |
| Dec-05 | 19.39 |
| Dec-06 | 23.99 |
| Dec-07 | 5.38 |
| Dec-08 | -4.9 |
| Dec-09 | -6.9 |
| Dec-10 | 9.58 |
| Dec-11 | 21.5 |
| Dec-12 | 20.44 |
| Dec-13 | 31.32 |
| Dec-14 | 38.18 |
Relative Valuation
In terms of valuation, the stock sells at a trailing P/E of 15.6x, trading at a discount compared to an average of 35.2x for the industry. To use another metric, its price-to-book ratio of 6.09x indicates a premium versus the industry average of 2.40x while the price-to-sales ratio of 3.03x is above the industry average of 1.86x.
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 $30,571, which represents a 25% compound annual growth rate (CAGR).
Final comment
As outlined in the article, the casino company faces no new competition until late this year in Asia or Las Vegas. Further, it will open its own new Macau casino next year. These attractive regions constitute great growth opportunities for the upcoming future.
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 Joel Greenblatt (Trades, Portfolio), Bill Nygren (Trades, Portfolio), Chris Davis (Trades, Portfolio), Frank Sands (Trades, Portfolio) and Mario Gabelli (Trades, Portfolio) added this stock to their portfolios in the fourth quarter of 2014, as well as PRIMECAP Management (Trades, Portfolio).
Disclosure: Omar Venerio holds no position in any stocks mentioned.
