LVS’s 2Q12–plusses and minuses

the report

After the New York close last Wednesday, LVS reported its 2Q12 results.  Revenue came in at $2.6 billion, up 10.1% from what the company took in during the year-ago quarter.  EBITDA (earnings before interest, taxes, depreciation and amortization) came in at $844.7 million.  That’s $56.9 million, or 6.3%, less than during 2Q11.

EPS were $.44 for the quarter, vs. $.54 in the comparable three months of 2011.  The figures were also considerably below the brokerage house analysts’ consensus of $.60 a share.

Wall Street didn’t like this news. The stock dropped more than 5%, breaking through support levels that had held over the past year, before recovering somewhat.  This is despite the fact that LVS had already lost almost 40% of its market value during the past several months on worries that Chinese gamblers would pull in their horns as the mainland economy slows.  It also didn’t matter that the entire earnings “miss” was the result of random or non-recurring factors.

There was one piece of bad news, coming out of Singapore.  Nevertheless, I think the stock weakness was a knee-jerk reaction to the headline numbers, not a result of analysis of the facts.

details

US

EBITDA was down about $22 million year on year for the quarter, at $91.3 million.  Bethlehem, PA chipped in an extra $5.9 million (the first time I think I’ve ever mentioned this casino in a post).  Otherwise, the business was flattish.  The biggest single reason for the yoy decline was that table games players were much “luckier” than average in Las Vegas.  They lost 16.5¢ of every dollar bet during 2Q12 vs. 20¢ during 2Q11–and a normal loss rate of 21%-24%.

Macau

Revenues for Sands China (HK: 1928) came in at $1.48 billion during 2Q12, up 22.3% from the $1.21 billion in revenue posted during 2Q11.  EBITDA rose by $41.0 million, or 10.7%, yoy, to $429 million.

That came despite pre-opening expenses that were $25.3 million higher than a year ago, mostly due to the debut of the new Cotai Central casino during the quarter.  In addition, high-roller patrons of the Venetian Macao, who were unusually unlucky this time last year, turned the tables during 2Q12 and took home more than their long-term average amount.  Factoring these two influences out, I think EBITDA would have been up by 20% or so.

One more complication:  during the quarter Sands wrote off $100.8 million it had spent on site preparation at yet another potential Cotai casino location–one the government there has denied Sands permission to develop.  The combination of the writeoff, pre-opening expenses and bad luck pushed net income down by 40% yoy to $160.5 million.

Still another quibble (a minor one, in my view, but apparently more than that to the markets):  LVS opened a significant new casino in Cotai during 2Q12, but its market share for the quarter didn’t expand as much as its increase in gambling capacity.  If the situation stays that way, it’s a problem.  I think it’s way too soon to judge, however.

A final point:  some commentators have criticized LVS for continuing a pell-mell expansion in Macau despite the current slowdown.  Quite the contrary.  Earlier this month, LVS announced it had requested government permission to push back completion of its current Cotai project by three years.

Singapore

Revenue for the Marina Bay Sands was down 5.8% yoy, at $694.8 million. during 2Q12.  EBITDA was down by 18.5% at $330.4 million.  Two reasons:

–high-roller gambling was off by about 6% and those who played were unusually lucky.  About half of the revenue effect–but none of the back luck–was offset by mass market gains.

–the provision Marina Bay Sands made for questionable receivables–which means gamling credit advances to high rollers that may not be paid back–amounted to $39.9 million in 2Q12 vs. $11.4 million in 2Q11.

If there’s a worry in the 50+ pages of the LVS’s quarterly earnings release, this is it.  I’m not particularly concerned.  The provision boosts the company’s bad credit reserve in Singapore to about a quarter of the $822 million in receivables outstanding.  It comes from specific identification of gamblers who have not been paying their bills on time.  It presumably also coincides with withdrawal of credit from these individuals.  So the issue will likely gradually fade away.  It bears watching, though.

overall

LVS estimates that eps would have been $.08 higher if its luck had been in line with long-term experience.  Another $.08 would have been tacked on, save for the writeoff in Macau.  Arguably, then, Wall Street hit LVS earnings right on the nose.

finances

Yes, EBITDA is not growing like it was a year ago.  But it appears to be at least steady at close to a $3.5 billion annual rate.

LVS now has $9.4 billion in debt outstanding (offset in part by $3.5 billion in cash), with borrowing costs of around 3%.  This implies annual net interest expense of a bit more than $350 million.  So pretax cash flow is in excess of $3 billion a year–meaning that the company could be completely debt-free in two years if it were to devote all its cash flow to repaying borrowings.  Quite a change from late 2008.

To my mind, it makes little sense to repay more than minimum requirements of very low-cost debt.  In fact, at 3% the company should be borrowing more.  LVS will have capital expenditures for the coming year of $1 billion.  It will also pay out $825 million in dividends.  But the point still remains that LVS is highly cash-generative.

valuation

LVS has a market capitalization of $30 billion.  Its interest in Sands China has a market value of about $18 billion.  If we award the same EBITDA multiple to 100%-owned Marina Bay Sands as Sands China receives in the Hong Kong market, the former has an asset value to LVS of $18 billion as well.  This leaves the US operations of LVS–Las Vegas, PA and royalty/management fees from Asia–with a value of minus $6 billion.

Of course, I have been making essentially the same argument for some time and that hasn’t stopped the stock price of LVS from plunging.  What’s happened is that the Hong Kong market is now pricing 1928 at $23 a share vs $32 in April.  However, the stock is now trading at about 12x cash flow and yielding 5%.  And that’s with cash flow at, or close to, what I think is a business cycle low.

That’s way too cheap. (Remember, I own LVS.  I’d own 1928, too, but I don’t want to buy on the pink sheets and a glitch in Fidelity’s software prevents Americans from buying the stock in Hong Kong).

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