THE HEDGEYE EDGE
Las Vegas Sands has transformed into that rare stock that should appeal to “Growth,” “Value”, and “Dividend/Cash Flow” investors alike. The stock now yields higher than the S&P 500 (43% sequential quarterly dividend increase), and the company is buying back $200 million + in stock a quarter, yet still retains a pristine balance sheet. The significant capital deployment opportunities can be funded out of annual free cash flow of nearly $4 billion. Management has indicated they are willing to raise leverage 1.5x which would still keep them well below industry average and if directed toward dividends, would result in a yield of over 6%. And we haven’t gotten to the $10-14 billion in mall assets that could be monetized.
Along with 15-20% same store growth in Macau, investors should be focused on the upcoming high ROI opportunities for LVS which include the opening of its newest mass-centric property on Cotai – The Parisian in 2015 and potential legalization in new markets such as Japan, Korea and Taiwan. Japan, in particular, is gaining steam as the final passage of a gaming bill by the Diet could potentially happen by Summer 2014. LVS is regarded as a highly attractive candidate for building in integrated resort in Japan given its success with Marina Bay Sands in Singapore.
We know of no other stocks in consumer land that provide this combination of cash flow, growth, cash return to shareholders, and value levers.
INTERMEDIATE TERM (TREND) (the next 3 months or more)
Macau fundamentals are outstanding and we expect an acceleration of growth in February. Within that favorable industry construct, LVS is nailing it operationally. The LVS properties continue to yield up their Mass tables impressively which is contributing to higher margins. Table yields have a long way to go and with the company’s extensive room base, cross marketing initiatives, and premium Mass push, LVS is likely to continue share growth in the rapidly growing Macau market.
Share growth and near term strength in Macau are two near-term catalysts. Others include potential legalization of casinos in Japan – LVS would be a leading contender to be awarded a license – and progress toward selling off the company’s significant retail mall assets.
LONG-TERM (TAIL) (the next 3 years or less)
Valuation is the main push back but with LVS’s combination of growth and cash flow, should we really be concerned with an EV/EBITDA multiple of 13x? Certainly not, especially when considering that a good portion of LVS’s profits are not taxed (approximately 55%), a benefit that isn’t captured by EV/EBITDA.
Future high ROI projects in Macau (The Parisian), Japan, and South Korea are also not captured. LVS should continue to garner more widespread investor appeal with its emerging cash distribution focus (dividend investors welcome) along with the existing growth investors.