Las Vegas Sands–a bounceback in 2Q11

the results

In 2Q11, LVS had unusually bad luck in its gambling operations in Singapore and in Las Vegas.  That happens occasionally.  Give a properly run casino enough time, however, and the odds even out.  2Q11 was a more normal quarter for the company from an odds point of view.  Combine that with stunning growth in Singapore, and the result was revenue for LVS during 2Q11 of $2.35 billion, up 47% year on year.  Eps of $.54 weere more than triple the net during the comparable period of 2010, and 25% ahead of the Wall Street consensus.

the details

To my mind, the biggest story is Singapore, where EBITDA (earnings before interest, taxes, depreciation and amortization–I’m not a fan of this metric, but it’s the one this industry uses) was $405.4 million, up 42% quarter on quarter (up “only” 30% if you adjust 1Q11 results up to reflect normal “luck”)July may turn out to be the best month ever for the Marina Bay complex–which, strictly speaking, isn’t even finished.  Singapore is now by far the most valuable part of LVS.

I wasn’t floored by the Macau results, which–at EBITDA of $391.6 million–were up 27.5% year on year and about 4% quarter on quarter (market growth rates were 40%+ and 12%+, respectively, during those periods).  The issues are new capacity that opened recently right next to some of LVS’s operations, and the time it tales to recover from the actions of an inept CEO (since fired; he’s suing).  The Hong Kong stock market, however, regards the earnings report as very good news.  Sands China was up 10% in overnight in a flat market.

Las Vegas continues its slow recovery.  LVS posted EBITDA of $92 million in 2Q11 for Nevada operations. The lion’s share of the $30+ million quarter on quarter gain is a return of casino “luck” to normal.

$10 billion in debt no longer looks like such a big problem

Roughly speaking, $4 billion of that amount is borrowed against Singapore operations, $3 billion against Macau and $3 billion against the US.  LVS has just renegotiated the Macau debt to extend maturities and lower interest expense by close to $100 million yearly.  LVS will likely refinance Singapore soon, as well.

My back-of-the-envelope guess is that the LVS empire will generate $2.5 billion-$3 billion in cash flow over the coming 12 months.  Call it $2.8 billion.  Assume calls on that cash of $1 billion for capital expenditure plus $300 million for interest expense and $200 million for extra working capital.  That leaves $1.3 billion to go to debt repayment.  If LVS could manage twelve months without major capital outlays, borrowings would be more than cut in half in under three years.

Also, were LVS to sell 15% of Marina Bay in an IPO, I think it would raise enough to wipe out all its US debt.  I doubt this will happen until the property is more mature, but the possibility has to make lenders–and investors–feel more comfortable about LVS’ debt level.

And, of course, LVS has $3 billion or so in cash on its balance sheet.

the stock

A sum of the parts calculation is probably the most reasonable.

At yesterday’s closing price, LVS had a market capitalization of $33.8 billion.  The company’s share of publicly traded Sands China is worth $17 billion.  If we assume that Marina Bay would trade on the same valuation as Sands China–which could prove much too low–then that 100%-owned property is worth $24 billion.

This means Wall Street is valuing LVS’ US operations at -$7 billion.  This compares with a +$7 billion implied valuation for WYNN’s US operations and +$3.3 billion for those of heavily indebted MGM.

LVS shares (which I own–I may sell some today, though) would have to rise by about 30%, just for the implied valuation of its US properties to match those of MGM.  It would take a 20% rise just to get the value up to zero.

Why the disconnect?  I don’t know.  The former CEO of Sands China is suing, and claiming all sorts of improprieties by LVS management.  It’s also possible that some investors are uncomfortable with LVS’s debt–I know I have been–or don’t understand that the earnings disappointment in 1Q11 is just one of those things that happen in the gambling business.

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