4Q12 for Las Vegas Sands (LVS): Asian good times are back

the report

After the New York close yesterday, LVS reported its 4Q12 earnings results.  The company reported profits of $434.8 million, or $.54 a share, on revenues of $3.06 billion.  EBITDA (earnings before interest, taxes, depreciation and amortization–a measure of operating profits) was $1.002 billion.

Revenues were up 20% year on year, net income up 35%.

As regular readers know, casino company financials are unusual in that what counts as revenue for gambling companies is not the amount bet by customers but rather the portion of that amount that the casino retains or “holds”–that is to say, the amount that customers lose.  The amount bet, which appears nowhere on the income statement (but is normally somewhere in the company press release), is, in my experience, a relatively stable and pretictable function of customers’ income and casino floor space.  The “hold,” on the other hand, is also a function of luck, which can vary considerably over short periods of time.  The first thing an analyst will do in looking at casino earnings is to correct them for these luck variations.

As for LVS, the company was unusually lucky in Macau during 4Q12, but unlucky everywhere else.  Overall, EPS would have been $.63 if the company had had average luck throughout its operations.  That compares with the Wall Street consensus, which I’ve always read as being luck neutral, of $.59.

LVS has also raised its quarterly per share dividend from $.25 to $.35, starting with the March 2013 payout.

As I’m writing this, the stock is up by about 5% in after hours trading.

the details


Sands China generated EBITDA of $622.2 million during the quarter, up 44% year on year.  Subtracting out unusually good luck, EBITDA was $575.4 million, up 32.5% vs. 4Q11.

LVS’s aggressive expansion in developing the Cotai area appears to be paying off.  Because it has developed extra capacity, it stands to benefit disproportionately as both economic recovery on the mainland and better transportation links deliver increasing numbers of visitors to Macau.

Perhaps more important, LVS announced it has been granted permission by the Macau government to add 200 new tables to its casinos, a strong sign that the SAR approves of the way Sands China is doing business.


After having hold-adjusted EBITDA stall, with a slight downward bias, for the last year at around $380 million, Marina Bay posted 4Q12 EBITDA of $406.4 million, up 6.8% yoy and 9.1% qoq.  Although this market is so new it’s impossible to interpret the figures with any confidence, the fact that EBITDA is moving up again is encouraging.

the US

Flattish EBITDA, which is all investors should want.  Hold-adjusted, Las Vegas was down by $8.1 million at $87.9 million.  Bethlehem was up $3.0 million at $25.6 million.

asset value

LVS has a market cap, at the aftermarket quote, of about $45 billion.  It’s ownership of Hong Kong-traded Sands China is worth $29 billion.  If we applied the same valuation to 100%-owned Marina Bay Sands, it would be worth about the same.  But Singapore doesn’t appear to have the explosive growth potential of Macau, at least as things stand now.  Remember, though, this time a year ago there seemed to be no limit to the upward trajectory of Marina Bay’s EBITDA, so we’ve got to keep an open mind.  Trying to be conservative, let’s say that current Singapore earnings are worth a multiple of .6x what Macau’s are.  That would give Marina Bay Sands an asset value of about $17 billion.

Together, the Asian properties explain the entire market value of LVS.

Over the next year, what might we reasonably expect from Asia?  Sands China could be trading at a price 20% higher than it is now, based on Macau market growth and increased Sands China market share.  Revival of the apparently more business cycle-sensitive Singapore gambling market might produce 10%-15% EBITDA growth and a mild expansion of the relative multiple.  If so, even if the market continues to value the US operations of LVS at the current zero, we should expect a substantially higher share price for LVS.


Full-year earnings for LVS in 2012 were $2.14/share.  To me, it seems reasonable to expect $2.50 in 2013–meaning LVS is currently trading on a forward earnings multiple of 22x.  Yes, that’s high, but it’s no longer in the stratosphere.  The stock also yields 2.6%.

Therefore, even on a conventional PE basis, which I don’t think is the right way to value the stock, LVS doesn’t look bad.



recent world currency movements: stock market implications

dramatic changes

Although currency movements sometimes can often be overlooked by a stock market investor immersed in the hustle and bustle of day-to-day trading action, there have been a couple of whopping big moves in major currencies over the past half-year.

Since late July 2012, the euro has risen by 12.5% against the dollar.  Over the same time span, the yen has fallen by about 16.5% against the greenback.  A quick bit of multiplication tells us this also means that the euro has risen by about 30% against the Japanese currency.

To my mind, there’s no really satisfactory general economic theory about how currencies work.  But to give a sense of perspective, inflation in Japan has been, say, -1% on an annual basis over the second half of 2012.  We’ve had +1.5% in the US.  Euroland has experienced a 2.5% rise in the price level.  Inflation differentials imply that the yen should be rising against the dollar at a 2.5% annual rate and against the euro by 3.5%.  The euro, in turn, should have weakened by 1% against the dollar and 3.5% against the yen.  The actual outcome has been far different.

Of course, there are reasons for the spectacular assent of the euro and the plunge of the yen.  Until around mid-year, many observers thought Euroland was coming apart at the seams and rushed to get their money out before the demise.  I’m sure there was more than a touch of flight capital mixed in the outflows.  Thanks to Mario Monti’s and Angela Merkel’s actions indicating the political will to save the euro, capital flows have reversed in spectacular fashion.

Newly-elected Japanese Prime Minister Shinzo Abe made it a central plank of his campaign for office that he intends to force the Bank of Japan to print lots of money.  Why?   …to weaken the yen and to create inflation.  The move could easily end in eventual economic disaster, but for now its main effect has been to drive the Japanese currency down a lot versus its trading partners’.

stock market implications

Generally speaking, a rising currency acts to slow down the domestic economy.  A falling currency gives the economy a temporary boost.

Currency changes can also rearrange the relative growth rates of different sectors.  The best-positioned companies will be those that have their sales in the strongest currencies and their costs (e.g., labor, raw materials, manufacturing) in the weakest.


The decline of the yen has given Japanese export-oriented firms a gigantic relative cost advantage against European competitors, and a significant, though smaller, one against US rivals–or those located in any country that ties its currency to the US$.  Anyone who sells products in Japan that are imported, or made with imported raw materials, has been crushed.

We’ve seen this movie before, however, on a couple of occasions.  It’s ugly.  Domestic firms lose.  Exporters will make substantial profit gains in the local currency.  But from a stock market view, that plus–with the possible exception of the autos–will be offset for foreigners by currency losses they have/will endure on their holdings.  Stocks in even the most advantaged sectors will deliver little better than breakeven to a $ investor, and will certainly rack up large losses to anyone interested in € returns, in my view.


The EU has already had a return-from-the-dead rally, where stocks of all stripes in the economically challenged areas of southern Europe have done well.  The message of the stronger currency is that importers, or purely domestic firms in defensive industries will fare the best from here.    Although I think the preferred place to be from a long-term perspective is owning high quality export-oriented industrials, the rise of the euro has blunted their near-term attractiveness.  One exception:  multinationals based in the UK, because sterling hasn’t participated in the euro’s rocketship ride.

Ideally, you’d want a firm that imports Japanese goods into the EU.

the US

Americans are less accustomed to thinking about currency effects that investors in other areas, where their effects are more pervasive.  With the dollar being in the middle between an appreciating euro and a depreciating yen, currency effects will be two-sided. Firms with large Japanese businesses, like luxury goods companies, will be losers.  Firms with large European assets and profits, like many staples companies, will be winners.  Tourism from the EU will be up, from Japan, down.  One odd effect, which I don’t see any obvious American publicly listed beneficiary–the decline in the yen is causing the cost of living for ordinary Japanese to rise sharply, since that country imports so many dollar-price raw materials.  To offset that effect, Japan is beginning to weaken protective barriers that have kept much cheaper finished goods (like food) from entering the Japanese market.  Doubly bad for Japanese farmers, though.

is the income tax preference for private equity justified? …I don’t think so

simplified preliminaries

Private equity investors raise money from institutional investors.  Those funds become the equity portion of highly debt-leveraged capital cocktails used to purchase underperforming companies.  Once in control of a target company, private equity typically tries to streamline operations.  It cuts overhead (including marketing and R&D) and staff, with the intention of selling the made-over and hopefully more profitable project firm, as a whole or in pieces, within five-seven years. 

Private equity is paid in two ways:  through recurring management fees for its projects, and through a share of the profits when the project company is sold.  Applied to private equity, carried interest refers to the practice of having the private equity managers’ compensation structured, either mostly or entirely, as equity–ownership interests in projects.  As a result, although the compensation sounds a lot like what hedge funds charge, it is taxed as long-term capital gains rather than ordinary income.   This “tax shelter” feature of private equity was highlighted in last year’s presidential campaign, which showed that Mitt Romney’s paid Federal income tax at about a third of the normal salary rate.

most investment professionals pay normal income tax

Last year, Representative Sander Levin of Michigan introduced a bill to close the tax loophole that private equity uses.  Mr. Levin has been quoted as saying that it isn’t fair for investment professionals to pay taxes at a lower rate than workers in other industries.  I agree.  I should point out, though, that Mr. Levin is wrong about one thing.  The income of the vast majority of investment professionals–private equity being the only notable exception–is already taxed as ordinary income.

is there reason for a tax preference for private equity managers?

Do private equity managers perform an important economic and social function that would not be accomplished if their compensation were taxed at normal rates?

The two potentially positive arguments that I can see are :

1.  that private equity managers are an essential part of the “creative destruction” that continually reinvigorates the US economy.  They take idle capital out of the hands of those who use it badly and put  those corporate assets into the hands of people who can employ it more effectively.  Sounds good.  But I haven’t read a single study of the private equity industry that shows conclusively that private equity makes the companies they acquire very much better.  Yes, barnacles get scraped off the bottoms.  But researchers I’ve read conclude that any supernormal returns generated by private equity projects come from the debt-heavy (read: very risky) financial structure they fashion in their project companies.

2.  that they provide counterbidders to trade buyers ( i.e., industrial companies) who would otherwise capture M&A targets too cheaply.  That’s probably true.  But this doesn’t man any extra social good is created.  This is more an issue of into whose pockets the purchase premium goes–the buyers’ or the sellers’.  Private equity tilts the field toward the sellers–who, by the way, happen to be the guys who have spawned and tolerated the inefficient entity.

lobbying legislators has been the key to preserving carried interest (no surprise here)

Heavy lobbying by the private equity industry, both in the US and in Europe, has protected the carried interest tax avoidance device so far.  Not for long, though, in my opinion.  Mitt Romney, a key figure in private equity a generation ago,  became a public illustration of how private equity mega-millionaires use the carried interest loophole to make their tax bills from Uncle Sam all but disappear.  It didn’t help, either, that Mr. Romney was inarticulate and disorganized during the campaign–and completely blown away organizationally and in the use of technology by Mr. Obama.  And Mr. Romney was supposed to be the cream of the private equity crop.  

luxury goods companies, including Apple: changes in the wind


Luxury goods customers fall into two camps:  the truly wealthy, and aspirational buyers.

The difference is this:

For the truly wealthy, price isn’t a determinant of what they buy.  The truly wealthy choose, say, a Bentley rather than a Hyundai because they like the way the motor sounds or because the seats are comfortable, or because it’s what they’ve always bought.  The fact that the Bentley costs 5x+ what the most expensive Hyundai sells for makes no difference.  Why?  It’s because the amount of money involved is–for them–insignificant.  It’s the same as the choice  between buying a so-so $5 t-shirt vs. a cooler $15 one as a travel souvenir might be for most of us.

Aspirational buyers, in contrast, are conscious of the price they’re paying.  And it may well be more than they can really afford.  But they buy the luxury brand anyway, as a way of announcing to the world that they have the wealth, or good taste or high social standing they aspire to.

For luxury goods companies, the wealthy remain steady customers through thick and thin.  Aspirational purchases ebb and flow with the economic cycle.

what’s happening today

By the way, Chinese customers, who have been avid buyers of most American and European luxury goods are beginning to turn to their own domestic brands.  I’m not sure how to make money from this, so for now it’s only an (interesting, I think) observation.

In the US, even as the economy continues to plod ahead–and evidence is accumulating that it may be shifting into a higher gear–aspirational buyers appear to be spending less on luxury goods rather than more.  Not so good for luxury goods companies, as we’ve seen in recent earnings reports from TIF, COH and AAPL.

But the more important investment question is:

–given that the aspirational buyer will have more money this year than last, and

–given that his largest source of wealth, his house, is starting to rise in value after five years in the doldrums,

where is he now spending his discretionary income?

I don’t know for sure.  If you have any ideas, please post a comment.

My preliminary guess is that aspirational buyers are doing home renovations and buying furniture.  This is what usually happens at the very start of an economic upturn, where Americans typically buy a house in year one and divert a lot of their income to fixing it up in year two.


At any rate, recent earnings reports from luxury goods companies seem to me to be another sign that the market pattern of focusing on companies that cater to the wealthy as hotspots of growth is over.




Apple(AAPL)’s 1Q13 earnings

the report

After the close yesterday AAPL announced its 1Q13 earnings results (the company’s fiscal year ends in October).  AAPL earned $13.81 per share on revenues of $54.5 billion, both all-time records.  Sales were up 18% year on year, EPS were down by $.06.  EPS exceeded the Wall Street consensus by a little.  Revenues were a tiny bit lower.

Note that 1Q13 had 13 weeks in it, 1Q12 had 14.  On an apples to apples basis, sales would have been up by about 25% and eps would have shown a gain of 10%+, I think.

new guidance

AAPL also announced it was changing the way it would give forward-looking earnings guidance–and provided the first figures using the new method.  Under Steve Jobs, the company gave what inevitably proved ludicrously low single-number suggestions about what its sales, margins and EPS for the following quarter would be.  I’m not positive AAPL intended its “guidance” to be funny, but the process ended up being almost a parody of the way most other companies proceed.  My strong impression is that AAPL knew the figures it suggested were wildly inaccurate.

Under Tim Cook, AAPL has decided to become a bit more conventional.  During the conference call the CFO said that 2Q13 revenue will likely be $41 billion – $43 billion.  Gross margin will be between 37.5% and 38.5%, operating expenses $3.8 billion – $3.9 billion.  Other income will be about $350 million and the tax rate will be around 26%.  Unlike the past, no EPS figure was given.

All that would imply EPS of around $10 for 2Q13–a figure substantially below the brokerage house consensus of $11.50.  Of course, until we have actuals to compare with we won’t know whether the new company guidance protocol is intended to be any more accurate than the old.

Nothing on the call thrilled Wall Street.  As I’m writing this in mid-afternoon, AAPL shares are down about 12% in an otherwise flat market.


The iPhone is fine.  Units were up 29% yoy (30%+, apples to apples), revenues up 28%.   iPhone 5 was capacity constrained for most of the quarter, iPhone 4 for the entire period.  So sales could have been higher.  Despite this, sales were in line with the growth of the smartphone industry. Remember, too, that smartphones are AAPL’s main business, comprising 60% of revenues and more than 2/3 of operating profit.  So this is the business that counts.

two points of weakness

Macs (10% of sales)

AAPL was capacity constrained with new iMacs.  AAPL’s PC unit volume was down 22% yoy (-15% is probably a better apples to apples number), in a market that declined by 6%, however. So having more iMacs on the shelves would have affected the degree of market underperformance, not the fact.   Higher unit selling prices meant that revenue declined by about 10% ata.

iPads (20% of sales)

Units were up 48% yoy (60% ata). That’s good.   But revenues were up only 22% (30%? ata).  That’s bad.

Yoy the average selling price of iPads in total (minis, iPad 2s and the newest models) dropped from $568 in 1Q12 to $467 during 1Q13.  In other words, during the year AAPL saw a massive move away from its flagship tablet offering toward cheaper models.  My back of the envelope guess is that the company sold around 13 million newest model iPads during the 2011 holiday season   …and only about half as many this time around.


A while ago, AAPL decided to move its computer line upmarket.  My guess is that it’s now suffering from a cyclical falloff in demand caused by macroeconomic weakness–and made somewhat worse by the high price points.

The iPad numbers say to me that the tablet market is already quickly evolving away from the original high profit margin format of the original iPad, either toward a $400 price point for corporate/ education use and a $200-$300 price for consumers.  If I’m correct, the tablet market may end up being much bigger than previously thought, but it won’t follow anything like the high profit trajectory of the smartphone.  Note, too, that mini production was capacity constrained during the quarter.  The average unit price might have even been lower if AAPL had been able to satisfy all its potential mini customers.

my take

The tablet numbers are the only disturbing thing I found in the APPL quarterly information.  From what I’ve read, I’m not sure anyone else has noticed, however.  But both in tablets and Macs, AAPL has given the first hints that even it can be subject to business cycle forces.  That’s another way of saying that the company’s peak earnings acceleration phase may be behind it.

From a stock market point of view, however, investors have been discounting the arrival of this day (incorrectly, until now) for a half-decade.  AAPL has $137 billion in cash, about a third of its market capitalization, and no debt.  If we assume the company can earn $50 a share this year, it’s trading a 9x earnings, while growing at a bit less than 15% in weak economic times.  Better economic times should move that growth rate north.  Ex cash, AAPL shares are trading at 6x.  That’s crazy low.

where will the buyers come from?

I’ve read somewhere recently that over 3/4 of all equity mutual funds in the US have AAPL as one of their top few positions.  Equity oriented hedge funds have been up to their ears in the stock for a long time.

Two reasons why:

–it’s been a great stock to own for almost ten years, and

–at its peak, AAPL represented 10% of the IT sector’s market cap and 5% of the S&P 500’s.  Therefore, any professional concerned with outperforming an index would be forced to establish at least a market weighting in the stock in his portfolio, if for no other reason than to protect himself from losing ground to a surging AAPL stock price.

So, who’s left to buy?  No one.

What I’ve just written sounds pretty stupid, but it’s a situation that occurs often in smaller markets where one or two stocks dominate the index.  We just haven’t seen it in the US during my lifetime.

A common strategy in these markets is to neutralize the whales (have a market weighting) and try to achieve outperformance elsewhere. So virtually everyone already owns all the stock he ever intends to own.   The result is that surprisingly small amounts of buying and selling can move the giants a long way.

This may be happening with AAPL.  Certainly, in my opinion, the fundamentals don’t warrant the current low price.  But it’s anyone’s guess how long the current malaise may last.

going ex-growth: the (most times) arduous trip from growth stock to value stock

growth stocks

Growth stock investors are dreamers.  They try to find stocks that will grow faster than the consensus expects, for longer than the consensus expects.

As a good growth stock reports surprisingly good earnings results, the stock price typically rises.  Two causes:

–the stock adjusts up for the better earnings; and

–expectations for future growth rise, leading to price earnings multiple expansion.

If, for example, the stock is trading at 15x expected year-ahead earnings before the report, after the report it may end up trading at 18x the new, higher, level of expected earnings.

At some point, this explosive upward force becomes spent.  The reason may be technological change, or maybe new competition, or maybe the market for the company’s products is completely saturated  (a fuller discussion).  As this happens, the supercharged upward path I’ve just described begins to go into reverse.  The company reports disappointing earnings.  The stock moves downward to reflect new, lower, earnings expectations, and the price earnings multiple contracts.

Today’s question:  how/when does this negative process stop?

It’s important to realize that professional growth stock investors have seen this movie of mayhem and destruction many times before.  They know the plot lines well.  There may initially be some doubt about exactly when the downturn is commencing.  But growth investors know that how they sell a stock is the most crucial determinant of their long-term performance.  So once they become convinced that the salad days are done, they’ll be quick to sell.

The initial buyers will likely be non-professionals who see a decline as a chance to buy a stock they’ve heard about from the financial press or from friends and which appears on the surface to be less expensive than it previously was.   Or they may be members of the growing class of professional traders, many of them associated with hedge funds, who are not particularly interested in company fundamentals, but who buy and sell for short-term profits, either “reading” stock price charts or using their “feel” for the rhythms of the markets to make their decisions.  Eventually both groups also figure out the bloom is off the rose.  In my experience, the traders sell to cut their losses; the non-professionals continue to hang on.

The eventual home for former high-fliers is with value investors, who specialize in companies with flaws where the stock has been beaten down in an excess of negative emotion.  Typically, value investors use computer screens to identify the lowest, say, quintile of the market measured by price/cash flow or price/book value.  That will be the universe they study more closely to make their stock selections.  Many times, these stocks will be in highly business cycle-sensitive industries,  or ones that show little growth.  Companies may be laggards in their industries, either because of poor management or other fixable problems.  Value investors typically say that they buy $1 worth of assets/earnings for $.30 and sell it at $.80.

The point is it usually takes a long period of time, and enormous deterioration of a growth stock’s fundamentals, before the fallen angel sinks low enough to catch the value stock investor’s attention.  Also, like their growth stock counterparts, value investors have industries that they have studied carefully for years and which constitute their comfort zone.  The two areas of familiarity are pretty close to mutually exclusive.  So it may take an extremely cheap price for a value investor to take the risk of buying, say, a tech company instead of a presumably safer–or at least better understood–cement plant, auto parts maker or steel mill.

As I’ve written many times before, the one exception to this pattern that I’ve seen is AAPL, whose price earnings deterioration began five years or more ago (depending on how you count) despite continuing explosive earnings gains.  In fact, at present, AAPL shares are trading at a 25% discount to the market median PE multiple, according to Value Line.  True, there are qualitative signs that AAPL’s growth heyday may already be in the rear view mirror.  But the market’s bad treatment of the stock seems excessive to me.  Price action after the upcoming earnings report will be instructive.