LVS: GRASS IS GREENER ON BOTH SIDES

Persistently low Singapore hold is frustrating, but the dual appeal of this stock continues to grow.

The value and cash return part of the LVS thesis took a major turn positive last night.  For Q4, what would’ve been considered a great quarter one month ago should now be perceived as just ok.  LVS delivered a beat but on a hold adjusted basis.  As you know, I’ve liked LVS for a long time and certainly on the recent pullback.  However, I didn’t see Q4 as necessarily a positive or negative catalyst following the Q4 run up in stock price and positive estimate revisions.  We’ll get into what we liked and didn’t like about the quarter but the LVS story certainly got a lot more interesting last night.

For me, LVS began its transformation from a growth to growth/value/cash flow/cash return stock 2 quarters ago with a sharp dividend hike and the start of a meaningful share repurchase program.  See our 10/28/13 note “LVS: WHAT TYPE OF INVESTOR SHOULDN’T THIS APPEAL TOO?”

Minor “issues” with Q4 notwithstanding, that transformation took a few major steps forward last night.  Another ramp in stock buybacks, a huge dividend increase, and the revelation of yet another cash/value driver crystallizes the “other” side of the LVS story.  The growth side remains intact and should continue to attract the growth

investor.

As a born skeptic, I’ll hit on the negatives of Q4 first and then move to the overwhelming positive takeaways:

What we didn’t like:

  • Marina Bay Sands hold was low again. We’re using 2.65% as our normal hold, below theoretical and management’s recommendation for normal.  But 1.92%?  Until they can post a good hold Q, investors are going to assume low hold is structural and that could continue to suppress MBS’s valuation.
  • Rolling Chip volumes were 2% below our expectation and promotional expenses were a little higher.  However, slot volumes were better, RevPAR off the charts, and Mass was in-line.
  • Expenses were higher than we thought in Macau but given the rapid growth in volumes in Q4, this isn’t that surprising

What we liked:

  • Sequential dividend hike of 43%.  Though a monster growth story, LVS now yields 2.7%, above the S&P yield.
  • For the 2nd straight Q, LVS repurchased more than $200MM in stock at an average price near yesterday’s close
  • Despite dividend increases and share repurchases, net leverage is only 1.3x. Management indicated they would be willing to go 1.5x higher.  An increase to their limit would generate an additional $7 billion cash return to shareholders.  Phenomenal.
  • Another major value enhancer, management indicated they are commencing the approval process to sell retail assets that could drive another $12-14 billion in cash.
  • Venetian and Four Seasons volumes were terrific but held below normal.  Low hold on Mass is NOT included in management’s projection for hold adjusted EBITDA.
  • Management was bullish regarding the prospect of casinos in Japan and its prospects for a license in that country.  They consider MBS’s appeal to Japanese tourists and convention planners as a major selling point to the Japanese government.

The usual hold concerns at MBS could weigh on the stock as usual, but the takeaways from last night are overwhelmingly positive.  Any price weakness should be seen as an opportunity.  After all, how many other stocks can offer this kind of growth and value while lining your wallet with a rapidly growing cash stream?