Is the Barcelona Expansion a Strategic Move for Las Vegas Sands?
Edgar is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Casino stocks have been on spotlight lately with Bank of America (NYSE: BAC) entirely kicking Las Vegas Sands (NYSE: LVS) out of its portfolio. The mega bank acted shortly before Singapore's regulators fined Marina Bay Sands, an $8 billion casino resort of Las Vegas Sands. The $287,000 fine imposed by the Singapore regulators were due to the casino allowing adults under 21 years of age to gamble or bypass the entry levies that Singapore citizens must pay.
Short interest has also increased in most gaming stocks, especially the sector leaders that are heavily exposed to Macau's gambling slowdown: Las Vegas Sands, Wynn Resorts (NASDAQ: WYNN) and MGM Resorts (NYSE: MGM). Las Vegas Sands saw a short ratio increase of 15.36%, Wynn Resorts saw an increase of 15.84%, and MGM Resorts only 3.97% from its prior month. However, out of the aforementioned stocks what also strikes me as risk taking, is Las Vegas Sands' expansion plans into Spain at a time of a financial crisis recovery.
Quick Glance at Spain and its Tourism
Despite its recent real estate boom with construction reaching approximately 16% of GDP, Spain did see a tremendous rise to its middle class personal debt, which nearly tripled. Similar to our sub-prime crisis, the real estate boom came to a halt as the mortgages exceeded the value of their homes. As of 2012, the country boasted the 13th largest economy in the world in terms of GDP and did take Germany by surprise in nearly surpassing their income per capita in 2011. According to CIA World Factbook, Spain's budget deficit has made it vulnerable to financial contagion from other highly indebted eurozone members despite its efforts to curtail spending, privatize industries and boost competitiveness through reforms.
The high exposure of Spanish banks such as Banco Santander and Banco Bilbao Vizcaya Argentaria to the collapsed domestic construction and real estate market poses a continued risk for their financial sector. Spain is currently suffering from a 24.6% unemployment rate, which is higher than Greece's 22.6%. Statistics show that 40% of young Spaniards ages 18-35 are actively seeking for work and are having hard time finding it. One wants to question how much disposable income an average Spanish citizen will have to gamble with when job stability remains to be an ongoing concern? Sheldon Adelson attempting to tap into markets that its competitors Wynn Resorts and MGM Resorts are reluctant to go after, could in fact hurt the company's cash flow from operations.
The mini-strip in Barcelona is yet to be announced, but is going to cost Adelson an estimated $35 billion once completed. Today's announcement from the heavily indebted Catalonia of Spain set forth the plans for the $6 billion entertainment and casino complex that is going stimulate the economy of a country that is suffering from a severe unemployment. With 8 million visitors counted just in the month of July, tourism remains to be one of the strongest sectors that is thriving in Spain, constituting 11% of all employment.
Final Thought
Even though capital expenditures of LVS on building its establishments cannot be deducted from income for tax purposes, we still have to keep them in mind in assessing the cash flow statements. Many investors focus on free cash flow figures, which is the remaining cash after depreciation and amortization have been subtracted after cash from operations. Shrewd investors will completely avoid companies with high capex, especially if the company is not able to recoup its required rate of return on those assets on a specific period of time.
For a company that missed its last quarter earnings by $0.16 and continues to see lower forecasts from Macau's slowdown, I believe the mini Euro-Vegas might end up hurting the company's margins in 2013. My risk assessment reflects the extent of possible development costs, questions about demand, and the possibility of regulatory change associated with the new casino complex developments.
edgarambart30 has no positions in the stocks mentioned above. The Motley Fool owns shares of Bank of America. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.
