Las Vegas Sands (LVS): a revealing 4Q13 earnings report

the results

Last week LVS reported 4Q and full-year 2013 results.

The quarter was another very good one.  Revenue (remember, this basically means the amount won from gambling customers) was up 18.8%.  EBITDA (earnings before interest, taxes, depreciation and amortization), smoothed to eliminate the effects of good/bad luck, were up by 25.8%.   Macau was up 55.8%–meaning it was the whole growth story.  EPS, on the same adjusted basis, were up by 35.9% at $.87.

For the full year, the company made $2.90 a share in earnings, and paid out $2.00 a share in dividends.

a tale of three countries

I think for an investor it’s more imformative to look at full-year results than just 4Q13.  It’s easier to see the overall economic underpinnings of LVS this way.

LVS had adjusted EBITDA of $4.767 billion last year.  That breaks out as follows:

1.  the US = flattish, at less than 10% of the total

The US had EBITDA of $475 million in 2013.  That’s up by $30 million, or 6.7% the year prior.  Of the total, about 30% comes from royalties paid to the parent by Asian gaming operations ( to be honest, I’ve never followed up on this detail like I would if I were still working).  The rest is split about 3/4 for Las Vegas and 1/4 for Pennsylvania.

Las Vegas is still suffering from the massive overcapacity created by the major casino operators MGM, LVS and WYNN just as the economy was cresting in 2007.  In addition, revenue-hungry states are continuing to create new gambling capacity within their own borders, the latest being Massachusetts.

So flattish is my best guess for the next few years.

2.  Singapore = flattish at just about 30% of the total

The Marina Bay Sands had hold-adjusted EBITDA of $1.385 billion in 2013, up from $1,366 billion in 2012.

For the first time–or maybe the first time I’m aware of–LVS has stated (more or less) clearly its assessment of its Singapore operations.  The evaluation?  …the operation is mature.  It has been government policy in Singapore from the beginning to discourage local citizens from frequenting either of the casino operations in the island state.  So growth there is out.  Its high background check standards–again, no surprise–mean many VIP junket operators are barred from doing business there.  So any high roller growth will come slowly and be the result of hard work.

So Marina Bay has turned into a $1.5 billion yearly annuity.  Not the outcome one might have hoped for a few years ago from LVS’s huge investment, but not a bad result either.

Note:  Marina Bay has also had an unusually long streak of bad luck, during which the amount actually lost by high rollers has consistently fallen shy of what historical experience would lead one to expect.  (translation:  the actual results have been below the hold-adjusted amount).

3.  Macau = 60%+ of the total–and rising

Macau’s EBITDA in 2013 was $2.907 billion, up 45.6% from the prior year.

Yes, the year-on-year comparison is flattered by relative weakness in Macau during the leadership transition in Beijing two years ago.  So Sands China won’t be up by 50% again in 2014.

More important, mass market gambling–which is the sweet spot for LVS–is just beginning to emerge in Macau (more about this tomorrow).  LVS has the experience and the hotel/casino capacity to take advantage of this new trend.  In what will likely be a 15% growth year in revenue for the Macau market in the aggregate, I think Sands China has a reasonable shot at being up by 20% in–and by a considerably higher percentage in EBITDA.

the stock?

First, I should mention that until recently I’ve been selling bits and pieces of my casino stock holdings (WYNN, LVS, Galaxy) because of position size.  Because of this, I don’t feel any urgent desire to add more.

If I owned none?  I’d be torn between Galaxy and LVS (assuming, as I do, that LVS has created conditions where US citizens can’t buy Sands China–company representatives I’ve spoken with appear to be clueless).  

At 20x forward earnings and a dividend yield of 2.7%, LVS strikes me as appropriately valued today–not cheap, but not that expensive if my view on Macau proves correct.  Personally, I’d be waiting to see how the correction we’re in develops, for the chance of buying the stock, say, 10% cheaper than now.  

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