1Q12 for Las Vegas Sands/Sands China: record quarters again

the results

After the New York close last Wednesday, LVS reported results for 1Q12.  Revenues came in at $2.77 billion, up 30.8% year on year.  Adjusted Earnings Before Interest Taxes and Depreciation/Amortization (EBITDA) was $1.07 billion, up 42% yoy.  Adjusted EPS were $.70.  That was a gain of 89.2% over results in the year-ago quarter.  The figure also came in $.01/share above the highest Wall Street estimate, and $.07/share ahead of the consensus.

the details

EBITDA breaks out into:

$456.4 million in Macau, up 20.6% yoy

$472.5 million in Singapore, up 66.1% yoy

$115.8 million in Las Vegas, up 77.9% yoy

$27.5 million in Bethlehem, Pa., up 24.4% yoy.

three unusual items (all in Macau)

The ” adjusted” figures exclude two of the items:

–$51.5 million in pre-opening expenses for the Sands Cotai Central which opened earlier this month, and

–a $42.9 million writeoff of costs linked to the closing of the Zaia show at the Venetian Macau.

Results did, however, include $13 million of costs associated with retailing–management declined to provide any detail.

market reaction

1928 and LVS have dropped about 5% each on the results announcement, despite the obvious strength in the numbers.  I don’t see why.

True, there are some nits to pick, namely:

–LVS is currently keeping 3¢ of every dollar high rollers are betting in Singapore and in Macau.  History says that should be more like 2.85¢, or 5% less.  at some point the company will have a sub-par quarter or two to make up for the current largesse.  But that’s the nature of the casino business.

–There is the mystery $13 million loss in Macau.  But that’s more like a rounding error than a serious dent in operating income.

–EBITDA margins fell qoq in Macau in March.

On the other hand,

–management wasn’t much more incoherent than usual on the conference call that accompanied the announcement

–US operations are much healthier than they were a year ago

–1928 appears to be gaining market share in Macau, even before the new casino opening. Revenues were up 9% qoq, in a basically flat market.

–the mysterious $13 million shortfall in Macau seems to explain all the EBITDA margin deterioration in the SAR vs. 4Q11.  If management is correct in its diagnosis, this is a non-recurring item.  In addition,

LVS is deleveraging   …fast

At December 31, 2010, LVS had $10.1 billion in debt on its balance sheet plus $710.7 million in preferred stock.  Against that, the company had $3.04 billion in unrestricted cash.

As of March 31st, 2012, LVS has accumulated an extra $1 billion in cash.  All the preferred stock has been redeemed and debt is $200 million lower.

That’s about a $2 billion shrinkage in net borrowings.  At the current level of $1 billion in cash generation from operations per quarter, LVS could be completely debt free by June 2013.  (LVS points out that it could be completely debt free today, if it wanted to be, by selling a chunk of its retail space in Macau.)

next stop Spain?

LVS confirmed that it is deep in negotiations with Madrid and Barcelona to develop a huge casino/resort complex in Spain over a decade.  No details as yet.  I wrote about the possible Spanish expansion a little over a year ago.

investment arithmetic

I think that LVS will earn about $3 a share this year.  So at Friday’s closing price, LVS is trading at 18.6x this year’s earnings and yielding 1.7%.

That’s not the right way to value the company, however, in my opinion.  I prefer sum-of-the-parts.

Based on its current market cap in Hong Kong, LVS’s share of 1928 is worth roughly $22.5 billion.  If we think the Marina Bay Sands in Singapore should trade at 80% of 1928’s EBITDA multiple, then it’s worth about $25 billion ($31 billion if MBS were to trade at parity with 1928).

LVS’s market cap (even though it’s up over 30% ytd) is $41 billion.  Therefore, LVS’s US operations are still trading at a value of negative $6.5 billion.

What should the value of Las Vegas + Bethlehem be?

There are, of course, two parts to US profits for LVS–casino operations and management fees collected from Asia.  For simplicity’s sake, lump them together.  Say they’ll generate $600 million in cash from operations this year.  Let’s cut that down to $400 million after taxes.  Now, let’s assume this business never recovers and should be evaluated as if it were a junk bond.  If we assume a that the cash represents a yield of 7.5%, then the principal value of the “bond” should be $5.3 billion.  Subtract $2 billion in debt (that may be excessive, but…) and we’re left with $3.3 billion.

Fair value for LVS, then, should be $3.3 billion + $22.5 billion + $25 billion  =  $50.8 billion, or 24% higher than where the stock is currently trading.

WYNN may be the highest quality casino company, but this analysis means for me that LVS is the most attractive casino stock (remember, I own both LVS and WYNN–more WYNN than LVS, though).

Wynn Macau’s Cotai project

Wynn on Cotai

The reason I see for the recent strength in the shares of both Wynn Macau and its parent Wynn Resorts is a press report that 1128 will receive government approval this coming Monday for its proposed new casino in the Cotai section of the SAR.  The news was first published in the Portuguese-language newspaper Jornal Tribuna de Macau and subsequently in Macau Business.

According to MB, the contract signing ceremony will take place while Steve Wynn is in Macau next week, but the official announcement will not come until the contract is published in the Official Gazette in mid-May.


Twice before during the past several months, parties associated with WYNN have, prematurely, announced that the company had received approval for the project.  These breaches of protocol appear to have offended the Macau government and resulted in further delay each time.  In the current case, it appears to me that the leak must have come from the government itself, so the article shouldn’t matter.  When questioned about it, Mr. Wynn said nothing, just that he was hopeful of approval but that the decision was up to Macau.

The Wynn Cotai project, whose design was complete over a year ago, will include hotels, casino(s), restaurants, retail and convention/meeting space.  The size of the casino floorspace isn’t clear, although we know the Macau government is eager to see new projects contain a greater percentage of area devoted to non-gambling activities than has been the case to date.  The project will probably end up costing close to US$3 billion.  Opening could be in early 2016.

The Cotai casino would be good for WYNN and 1128…

Cotai, Sheldon Adelson’s idea for recreating the Ls Vegas Strip in Asia, is becoming the hot new gaming location in Macau.  Also, it’s increasingly evident that both Wynn and Encore in Macau are closing in on the limits of their capacity.  So the new project will provide a concrete (no pun intended) path for future earnings growth–both for 1128 and, by implication, for its parent WYNN.

…and for the SAR as well

After all, Steve Wynn is the premier casino designer in the world.  And his company is a master at catering to high roller gamblers.  It would make no sense for the SAR to deprive itself of his expertise.

approval for another firm coming later this year

The government’s overall idea is to continue to expand its tourism business, but at a controlled rate.  It has announced that this means approving two new projects in 2012.

The two prominent other applicants for permission to build a new Cotai casino complex are MGM China and SJM.  If they’re the two finalists, as they probably are, this presents an interesting–and possibly revealing– decision for the SAR.  SJM, the former monopoly casino operator when Macau was a Portuguese colony, which continues to control about a third of the market, is owned by the Ho family.  Pansy Ho also continues to have significant influence over MGM China, where she has about a 20% equity interest.  Declaration of the winner may give some insight into the direction of government gambling policy.

Bond Environment, 2Q12 (ii)

This is the second installment of the current bond market outlook of Denis Jamison of Strategy Managers, LLC.  The first installment appeared yesterday.
Free money…
…at least until 2014 according to the Federal Reserve. They just about guaranteed they will maintain the current zero to 0.25% Federal Funds rate until early 2014.
When the financial crisis began to unfold in 2008, the Federal Reserve responded by flooding the monetary system with credit. Now, they have a new gambit in their efforts to push consumers and businesses toward more spending – a low interest rate guarantee. The Fed seems to be taking the role of the real estate salesperson getting you to buy a house you can’t afford by offering a temporarily low mortgage rate or the car dealer looking to reduce inventories by providing zero percent financing. As Yogi Berra said after seeing back-to-back homers by Maris and Mantle, “it’s déjà vu, all over again.” Wasn’t it the mispricing and misallocation of capital that got us here in the first place?
Excess liquidity creates bubbles either in the real economy or the financial markets. Right now, the benefits of low interest rates and surplus central bank credit have flowed to the financial markets and the big commercial banks. Market participants know the Fed is behind the curve on its interest rate policy. Based on a formula derived by Stanford University economist John Taylor, the current short-term interest rate should be 0.65%. That, however, is based on trailing core CPI of just 1.9% and the current unemployment level of 8.2%. It’s reasonable to assume that core CPI will trend higher -CPI including food and energy prices is already 2.7% – and the unemployment rate will gradually respond to 2%-plus GDP growth. If you plug 2.25% inflation and 7.5% unemployment into the professor’s formula, you come up with a Federal Funds target of 1.8%. How we get there from here is anyone’s guess. But it’s very hard to get the air out of bubbles – financial or otherwise – without a pop.
Go Straight Ahead
When you reach $5 trillion, make a sharp left. That appears to have been the roadmap for the federal government’s debt expansion. From 1970 until 2008, the outstanding debt grew about 3.5% yearly and reached about $5 trillion. (In the Fifties and early Sixties, the annual increase was less than 1 %.) Direct federal government debt is now $10.4 trillion or about 68% of nominal GDP. (This only includes public debt outstanding. It doesn’t include the $4.7 trillion of inter-government holdings – otherwise known as the Social Security Trust Fund – theoretically owed by the federal government .) With the government’s debt burden growing at 11% a year and nominal GDP expanding 4% to 5%, debt could top GDP within six years.
That’s the point of no return – the debt trap. From that point forward, the cost of funding the national debt will grow faster than the economy.
There are only two ways to escape the debt trap: budget austerity or currency devaluation. So far, our elected officials appear to be unwilling to address the first alternative – and for good reason. Most of the money is spent on folks who vote. Social Security, Medicare and Medicaid account for 44% of total outlays. The defense budget grabs another 24% and social welfare spending – mostly going to state and local governments – claims another 12%. That’s 80% of the total. (Meanwhile, the small 6% slice going to pay the interest on the national debt will likely balloon over the next few years.) Devaluation is tricky – but much more doable. If inflation can be pushed higher, the nominal value of everything real goes up and the actual value of debt goes down. It’s worth remembering from 1974 through 1981, nominal GDP grew at a 10% annual rate despite two recessions. Little of this growth was real – inflation adjusted GDP averaged just above 2% a year –but it sure lowered everyone’s debt burden.  In that regard, it’s worth citing a quote from Adam Smith, “All money is a matter of belief.”
Keeping a Low Profile
We continue to keep the effective maturity of our clients portfolio’s below that of their benchmarks. This served us well during the March quarter and the accounts tended to outperform their benchmarks. It is worth noting, however, that a bearish stance in a bear market does not necessarily mean you make money. Good relative performance does not mean good absolute performance. During 2011, long-term U.S. Treasury bonds returned nearly 30% and the mortgage market recorded an 8% gain. We expect most of those outsized increases to be reversed this year. Given the low absolute level of coupon income for most bonds, even a small increase in interest rates will translate into a negative total return. The current year promises to be quite difficult for most bond investors.

Bond Environment, 2Q12 (i)

Here’s the first part (of two) of the April bond market analysis prepared for clients by the firm of my friend and mentor, Denis Jamison.  The second will appear tomorrow.
The alarm clock sounded for bond investors in the March quarter.
On the strength of some positive readings on the economy, markets discounted the possibility of additional Federal Reserve easing.  More accommodative policies by the European central bank reduced the risk of a credit crisis in Spain and Italy. Accordingly, doomsday speculators pulled money from the U.S. government bond market. The result was a dip in bond prices. With little coupon income to cushion the fall, investors suffered big losses.
Long term U.S. Treasury bonds recorded a negative 6% total return. Other sectors fared better; mortgages returned about 0.6% for the quarter while corporate bonds gained about 2.5%. The investment dynamics of these sectors differ somewhat from those of the government bond market. Mortgages are big beneficiaries of the Fed’s zero short-term interest rate policy while corporate securities are helped by the improving financial strength of U.S. business, especially the banks. Yield spreads between corporate bonds and U.S. Treasuries narrowed sharply during the quarter. Whether this can continue, remains to be seen.
Bond prices snapped back sharply after a ho-hum employment reading for March (reported on April 6th)
…and on renewed concerns about Spain’s fiscal position. However, investor focus on these transient economic and credit risk factors obscures the underlying reality of the government bond market. The current low yield level has made these securities more risky. Their price sensitivity to any given change in interest rates has increased. For example, a full coupon thirty year bond priced to yield 3% is about 10% more volatile than a similar full coupon security priced to yield 4%. In addition, there is significantly less coupon income now than in prior periods.
The fixed income markets are anesthetized by a cocktail of promised zero short-term interest rates, a flood of liquidity being provided by central banks around the world and quiescent inflation.  So, it is likely we will continue along the bottom of this interest rate trough for some time.  That doesn’t mean, however, that the bumps and dips won’t provide large swings in total returns for bond holders.
Back on track?
For the U.S. economy, that’s probably true. Despite disappointment regarding the March employment numbers, by any reasonable measure, the U.S. economic expansion is where it should be. Based on the March workplace survey by the U.S. Labor Department, about 132.8 million folks are employed versus 130 million a year ago. That’s a 2.1% year on year gain. A respectable increase considering that the public sector – particularly state and local governments – reduced payrolls. Only 22 million people worked in the public sector in March – 600,000 less than a year ago. In addition to the increase in total workforce, those employed are taking home more money. Average weekly earnings are up about 2.6% over the last twelve months.
Thanks to the employment gains and higher earnings,
retail sales have fully recovered from the recession lows.  They are running ahead 6.5% on a year over year basis. Auto sales are now averaging between 14 and 15 million units on an annualized basis compared with less than 10 million units during much of 2009.  GDP – the broad measure of total goods and services being produced in the U.S. economy – grew at a 3% rate during the final quarter of 2011. While that pace of expansion is unlikely to be sustained, it is reasonable to expect growth will exceed the 1.6% pace set during the full year of 2011. Most economists predict something between 2% and 2.5% growth this year.
Most of the risks to this moderate expansion scenario don’t hold up well under close examination.
Some argue that the recent growth spurt is being fueled by the large increase in reported consumer debt – consumer credit expanded 6.9% in the final months of 2011. However, most of that increase reflected an expansion of government education loan programs which replaced private sector programs that were not included in the consumer credit totals. Basically, the consumer is not overextended. Gasoline prices are also a concern to many. However, auto fuel efficiency has increased and gasoline usage is down. Price changes at the pump will have a much more muted impact on consumer spending. Given this backdrop, it isn’t surprising that many Fed governors are beginning to question the need for a continuation of the current monetary stimuli being provided by the central bank. However, financial markets now appear to be addicted to these opiates. This may be the real risk facing both investors and the working public.
Stay tuned for the concluding section of the Jamison report tomorrow.

AAPL’s 2Q12: deja vu all over again

the results

After the close of New York trading yesterday, AAPL reported results for its second fiscal quarter (the company’s fiscal year ends in October).

It was–contrary to highly publicized negative analyst expectations–another litany of record performances.

Revenue was $39.2 billion, up 58.7% year on year.

Net income was $11.6 billion, up 93.3%.

EPS was $12.30, a 92% yoy gain.  Of 42 analyst estimates for the quarter, the lowest was $8.46, the highest $11.80, the median $9.81.  So, once again, AAPL blew away the consensus.


The company sold 35.1 million iPhones during the quarter, up 88%.  This compares with 46% growth in the overall smartphone market.

iPad sales were 11.8 million, a 151% yoy increase.

4 million Macs went out the door, up 7% yoy (in a PC market that was up 2%).

iPod unit volume was 7.7 million units, down by 15%.  The music player–which was once half the company–now represents only 3% of sales, however.

what caught my eye

AAPL continues to be capacity constrained with the new iPad.  The huge tablet sales gain this quarter appears to have been driven by demand–especially from schools–for iPad2, once AAPL dropped the price to $399.  I don’t see any reason to think that this new-found new source of tablet demand will go away any time soon.  And it could turn out to be very big.

Greater China was the geographical star.  Sales in the region, which made up 20% of the AAPL total for the quarter, tripled yoy.  iPhone sales were 5x the year-ago level.

Mac sales barely outpaced the market for the quarter.  But that’s comparing a newly refreshed product line a year ago with the same lineup today–now a little long in the tooth.  So I don’t think the weaker than usual comparison means anything.

Management gave its usual song and dance to “justify” its low-ball earnings estimate for the June quarter–$8.68/ share.  The company did make two reasonable points, though.  It expects to sell a lot of iPads, which carry lower margins than other AAPL products.  Also, 2+ million of the iPhones sold to telephone companies during the period went to replenish store inventories depleted during the holiday season.  This extra demand won’t be present in the current quarter.  Neither is that significant, in my opinion.  Together, they may just mean that yoy gains in 3Q12 won’t be quite as impressive as in 2Q12.

pre-announcement analyst panic

AAPL sold off by about 15% in the days before the earnings release.

I was struck by the number of analysts who rushed to publicly validate the price decline by offering negative assessments (now proven to have been wildly incorrect) of the company’s 2Q12 prospects.  One can only imagine what they were saying in private meetings with institutional clients.  I was also struck by the dearth of AAPL defenders–although it’s possible their comments were edited out.

For instance,:

–one analyst I read predicted Mac sales would be down, year on year, in the quarter–without mentioning either how difficult the comparison was or that Macs only make up a bit more than 10% of AAPL’s business.

–another said in a recent TV interview that he was lowering his forecast of iPhone sales from 33 million to 30 million–and intimated he thought that figure might still be too high.

I have four observations:

1.  I think the analysts in question extrapolated from what they knew about the US and Europe to the rest of the world.  When you think about it, that seems kind of loony.  Why would you think China, which is growing at 7%+ and where people are just starting to buy smartphones, would look like the US?

2.  More generally, the incident says something about the quality of research on Wall Street.  APPL isn’t the only case.  Analysts did the same sort of extrapolation with INTC last year.

3.  It says something admirable about AAPL that they don’t have one standard of information dissemination for ordinary people like you and me, and another one for Wall Street analysts.

4.  This shows how a rumor-driven market works.  Once a story starts, information sources rush to repeat and amplify the rumors, mostly because they’re worried that otherwise they’ll be thought to be out of touch.

AAPL’s stock?  It still looks cheap to me.