the report
After the close of New York trading on October 27th, LVS reported 3Q11 results. Revenue was a record $2.41 billion, up 26% year on year. Property EBITDA (earnings before interest, taxes and depreciation and amortization) was up 43.2% to $924.1 million. EPS were $.55, a 61.8% boost over earnings in 3Q10. The Wall Street consensus eps estimate was $.52.
LVS shares are up by about 4% in aftermarket trading as I’m writing this.
the details
In what follows, it’s important to remember that what a casino company reports as gambling revenue is not the total amount of money bet, but rather the portion of the money bet that it retains or “wins.” Over a long period of time, the casino’s winning percentage is relatively steady. In any given quarter, however, it can move away substantially from the long-run average. In analyzing quarterly results, we should note any short-term deviations and at least mentally adjust for them.
Singapore
Year on year comparisons for the Marina Bay Sands aren’t that helpful, because the casino/resort complex is so new. I’m using quarter on quarter comparisons, instead.
Gambling activity continues to grow rapidly. EBITDA, which was $413.9 million for 3Q11 vs. $405.4 million in 2Q11 doesn’t show this clearly, though. That’s because the high roller winning percentage at Marina Bay was 2.99% in 2Q11 and 2.69% in 3Q11 (LVS thinks the normal range for quarterly win in the VIP segment, by far the casino’s largest, should be 2.8%-3.0%). The q-on-q decline in winning percentage clipped about $35 million from 3Q EBITDA. The real quarter on quarter growth rate is 10%+, not the 2%+ the accounts show.
VIPs bet an eye-popping $16.7 billion at Marina Bay during 3Q11. This compares with $12.2 billion in 2Q11 and $10.2 billion in 3Q10–both breathtaking numbers in their own right.
Macau
Same story here. EBITDA in 3Q11 was $388.3 million, down $3.3 million compared with 2Q11–at a time when market growth, quarter on quarter, was about 10%. Adjusting Sands China’s winning percentage up to 2Q11 level adds $40 million to the EBITDA line. This suggests that Sands China held its own in a growing market, despite not adding any casino space this year.
Sands China’s newest, 13.7 million square foot casino in Cotai is slated to open in five months.
US
I’m going to ignore Bethlehem, PA because it’s so small (EBITDA of $25.2 million in the quarter).
EBITDA in Las Vegas was $94.3 million for the seasonally weak 3Q, up slightly from $92.9 million in 2Q11 but up sharply from $58.3 million in 3Q10. About $10 million of the increase on a year over year basis is due to higher royalty income from Macau and Singapore. Most of the rest is a halving in the level of giveaways from the $40 million or so LVS needed last year to get customers to come to its Las Vegas properties.
In short, LVS is holding its own in the US and is making money hand over fist in Macau and Singapore.
valuation remains compelling, in my view
(Remember, I own LVS, WYNN and 1128 (if it weren’t for a software glitch Fidelity can’t find/fix, I’d own 1928, too)).
Look first at WYNN, which I consider to have the strongest gambling company management. Its interest in 1128 is worth about $11.5 billion at today’s market price. Therefore, the market is valuing the US interests of WYNN at about $5.5 billion.
Next, MGM, the weakest of the big firms. Its interest in MGM China is worth $3 billion, implying its other interests, including its entanglement with Pansy Ho, are worth $2.7 billion.
What about LVS? The market in Hong Kong values its interest in 1928 at $17 billion. Arguably, Marina Bay should be valued at a premium to Sands China. But capitalizing its earnings on the same basis as 1928 yields a value for the 100%-owned Singapore subsidiary of $25 billion. This would mean the market values the rest of LVS–Las Vegas and Pennsylvania–at minus $9 billion. LVS shares would have to be almost 30% higher just to get the needle out of the minus column.
is there a reason for the apparent undervaluation?
A friend who’s a regular reader of PSI asked about ongoing litigation involving LVS, based on a Wall Street Journal article a week or so ago. I’ll write about this on Sunday.
The litigation may well be a serious issue. I don’t know. On the other hand, the stock price already seems to me to be discounting a very unfavorable outcome.
Also, arguably LVS’s leading position in two major Asian markets and its tourist/convention emphasis make it attractive to other countries interested in creating a tourism/gaming industry. Both WYNN and LVS are seeing synergy effects in Las Vegas from their Asian exposure; LVS is seeing this in Singapore. One might therefore expect LVS to be trading at a premium to its competitors, not a steep discount.