a big valuation discount
As I wrote on Friday, the most striking thing to me as an investor about LVS is the huge valuation discount at which it trades compared with its global rivals WYNN and MGM.
To recap: if we take the current market price in Hong Kong of the firms’ interests in Macau, and in LVS’s case us the same multiple to value its Singapore casino, we get the following results:
market cap of WYNN = $17 billion = market cap of Macau interests + $5 billion
market cap of MGM = $6 billion = market cap of Macau + $2 billion
market cap of LVS = $34 billion = market cap of Macau + Singapore – $11 billion.
LVS shares would have to be trading about a third higher just to have its Las Vegas interests valued at zero.
Q: Why is LVS trading so cheaply?
A: I don’t know. What is striking, however, is not necessarily that LVS is so cheap on an absolute basis (although I think it is) but that is so cheap relative to its industry peers.
the financial crisis
LVS was in the midst of aggressive expansion when the financial crisis hit. In late 2008 the company announced that its auditors were questioning LVS’s ability to avoid being crushed by a mountain of debt. It took a $2.1 billion capital raising and a modification of LVS’s expenditure plan for the accountants to issue a clean bill of health. Not LVS’s finest hour.
Every company is involved in lawsuits or one type or another. Wall Street typically ignores them.
In LVS’s case, however, even though little, if anything, is put down on paper, a series of legal actions appear to have analysts and investors concerned. Here’s a quote from the company’s latest 10-K (LVSC is Las Vegas Sands Corp.; SCL is Sands China Ltd.:
“On October 20, 2010, Steven C. Jacobs, the former Chief Executive Officer of SCL, filed an action against LVSC and SCL in the District Court of Clark County, Nevada, alleging breach of contract against LVSC and SCL and breach of the implied covenant of good faith and fair dealing and tortious discharge in violation of public policy against LVSC. Mr. Jacobs is seeking unspecified damages. This action is in a preliminary stage. The Company intends to vigorously defend this matter.
On February 9, 2011, LVSC received a subpoena from the SEC requesting that the Company produce documents relating to its compliance with the Foreign Corrupt Practices Act. The Company has also been advised by the Department of Justice that it is conducting a similar investigation. It is the Company’s belief that the subpoena emanated from allegations contained in the lawsuit filed by Steven C. Jacobs described above. The Company intends to cooperate with the investigations.”
LVS fired Mr. Jacobs in mid-2010. He sued for wrongful termination. Press reports indicate that in his lawsuit Mr. Jacobs maintains that LVS asked him to compile files on prominent Macau politicians and to offer some of them improper benefits. These assertions appear to have prompted a number of regulatory inquiries, both in the US and in Hong Kong/Macau. As far as I’m aware, Singapore, which runs a very strict regulatory regime and which awarded LVS one of two casino licenses there, has taken no action.
An article in the Wall Street Journal
from October 21 outlines the issues. This article prompted the question from a reader which has led to this post.
As an investor, not a lawyer, I find it impossible to predict an outcome to all this. I do have a number of observations:
–It seems to me that LVS has done the right thing by beefing up its legal staff with Washington regulatory experts. This gives them people who understand the regulatory environment and whom the regulators presumably trust.
–As a stock, LVS is up less than 5% over the past year. This compares with a gain of 8.8% for the S&P 500 and 28.8% for WYNN). Sands China, on the other hand, is up 46.1% over the same time period, vs. +32.7% for Wynn Macau and a loss of 13.3% for the Hang Seng index. So investors closest to the Macau situation don’t seem troubled by the legal issues surrounding LVS/Sands China; if anyone, it’s US investors who are.
–To my eye, Sands China’s results have perked up considerably since Mr. Jacobs was replaced.
–If the discount to its peers is due solely to legal worries, then the numbers above imply that Wall Street is anticipating a negative outcome on the order of $15 billion.
The correct number for legal damages may be zero, it may be a significant figure. I don’t know. I own LVS, which means I’m betting that $15 billion isn’t in the right ballpark, or even in the right town. (This isn’t how I usually invest. Normally, I’d want to have a precise downside estimate, which I don’t have here. So my position is small.)
About half the stock in LVS is owned by CEO Sheldon Adelson and his family. As the 10-K notes, Mr. Adelson’s financial interests may not be fully aligned with those of other shareholders. In particular, I’d characterize Mr. Adelson as a very aggressive investor in mammoth new projects who has gotten his fingers burned recently. He’s not one to quietly sit by and let his financial leverage decrease to zero.
That doesn’t bother me so much. It’s just a fact of life.
Based on my limited observation, though, because it’s “his” company, Mr. Adelson doesn’t seem to go to great lengths to cultivate the global securities analyst community. In his latest conference call, for example, he says he’s going to send analysts towels in the mail, so they can wipe the egg off their faces for underestimating LVS’s prospects. Maybe that’s a joke and I don’t realize it. Yes, it’s emotionally satisfying for Mr. Adelson. But it’s not a gesture aimed at making analysts feel all warm and cuddly about LVS shares …quite the opposite.
analysts are skittish
This is only partly because of the “us vs. them” undertone the company seems to foster. Analysts on this stock seem to me to divide into two types: Wall Street analysts who know a lot about Las Vegas-style gambling but nothing about Asia; and Singapore or Hong Kong analysts who know the local market but nothing about the hotel or gambling industries. The biggest risk to either group is to be too bullish.
what to do
LVS has a special situation aspect to it, to my mind, because I think it trades at an undeserved discount to its peers. Operations around the world are going better than expected.
On the other hand, maybe I’m wrong. Although the stock has performed relatively well recently, it may take time for the discount to narrow. Negative news on the legal front probably won’t help performance, either.
LVS shares aren’t for the faint of heart, but I’m content to own them. They may, or may not, have a possible place in your portfolio. Don’t make this your largest position, though.