Should You Short This Stock Now?

Shas is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Las Vegas Sands (NYSE: LVS) announced fourth quarter results after the bell last Wednesday. The stock, which was at $53.38 at opening trade on Jan. 28, slipped 3.9% to $51.05 at the close of trading the next day. On the day the results were to be released, the stock gained 0.94% and closed at $51.56. However, after the results became public, the after hours quote was $54.25, a gain of 5.22%.

Considering that the company reported an increase of 36% in fourth quarter profit and that the stock rose 15% in January, is LVS a buy at this price or is it a good short? Let us review the results and try to find an answer.

Las Vegas Sands: The Company

LVS is a Fortune 500 company and a leading developer of destination properties (integrated resorts). It operates in Macao, Singapore and the US. The integrated resorts developed and operated by the company feature gaming, entertainment and retail, premium accommodations, convention and exhibition facilities. In Macao, the company operates through Sands China Ltd (SCL), 70.3% of which is owned by LVS. SCL operates The Venetian Macao; Four Seasons Macao; Sands Macao, and Other Asia (comprised primarily of its ferry operations and various other operations that are ancillary to its properties in Macao). The Singapore operating segment is comprised of Marina Bay Sands, which features roughly 2,600 rooms and suites along with 160,000 square feet of gaming space housing 2,500 slot machines and 600 gaming tables.

Las Vegas Sands’ US properties include the Venetian Resort Hotel Casino (The Venetian Las Vegas) and the Palazzo Resort Hotel Casino (The Palazzo), Five-Diamond luxury resorts on the Las Vegas Strip, as well as the Sands Expo and Convention Center (the Sands Expo Center) in Las Vegas, Nevada and the Sands Casino Resort Bethlehem (the Sands Bethlehem) in Bethlehem, Pennsylvania.

Earnings

  • Quarterly Results

Quarterly EPS of LVS declined sharply in the second quarter 2012 when it reported EPS of $0.44 as compared to $0.70 in the first quarter. However, in subsequent quarters, it was able to recover part of lost ground and reported EPS of $0.54 in the fourth quarter of 2012.

Net revenue increased by 20.9% and net income attributable to common stock rose by 35.8%, reaching $434.8 million. On Dec. 6 the company paid a special dividend of $2.75 per share in addition to the recurring dividend of $0.25 per share on Dec. 18.

Gaming volumes in Macao reached a record $622.2 million, which resulted in a 43.3% increase in property adjusted EBITDA in Macao.

  • Annual Results for the year ended Dec. 31, 2012

Net revenue for the year showed an increase of 18.3%, up from $9.41 billion to $11.13 billion. The company was able to post a record consolidated EBITDA of $3.79 billion, and net income attributable to common stock rose 20.1% to reach $1.52 billion or $1.85 per share. During the year, the company distributed $3.75 per share to shareholders by way of quarterly and special dividends.

Chairman and chief executive officer, Mr. Sheldon G. Adelson, said that despite the handsome dividend, the company was maintaining “a strong balance sheet and ample liquidity to pursue future growth opportunities."

One of the commonly adopted practices for evaluating future prospects of a company is to compare it with its peers. The problem here is that LVS is a market leader, and two companies that can be considered to be next in line, Wynn Resorts (NASDAQ: WYNN) and Melco Crown Entertainment (NASDAQ: MPEL) are much smaller with market caps of less than one-third of LVS.

Wynn Resorts owns, develops and operates destination casino resorts. The company operates two resorts: Wynn Las Vegas, Nevada and Wynn Macao in the Macao Special Administrative Region of the People’s Republic of China (Macau).

Melco Crown Entertainment, a holding company engaged in the gaming and hospitality industry in Macao,  operates two gaming and entertainment casinos in Macao through its subsidiaries. In the third quarter 2012, MPEL reported EPS of $0.2, which was 17.65% more than what was forecast.

Points to Consider

Book value per share of LVS is $11.04, which is far more than that of WYNN ($4.12) and MPEL ($5.97). LVS also has better operating margin (23.11%) as compared to WYNN (20.83%) and MPEL (12.66%).

Apart from earnings and key financial statistics, some other points to consider are:

  • LVS registered record gaming revenues in Macao, the world’s largest gaming market.
  • With the completion of the second Sheraton Macao Hotel tower in 2013, Sands China will have 9,000 rooms in Cotai Strip of Macao.
  • The World Bank raised the economic growth forecast for the Chinese economy following the fiscal stimulus and measures taken by the government for faster approval of investment.  As the Chinese economy grows, so does LVS.
  • LVS’ market share is secure. Property in Macao is under the strict control of the Chinese government, and no more hotels are expected to come up there for the next couple of years after LVS completes its project.
  • There is speculation that LVS may go for unlocking value and spin off its assets into separate companies – gaming, lodging and malls – and pursue a REIT strategy to increase shareholder value.

The only point of worry is that now that the quarterly earnings report has been released, the stock could be ready for a major correction. The performance of the stock has been impressive in the run up to the release of quarterly results.

Although the positives for the stock far outweigh the fear of a technical correction, investors would do well to watch the downside and protect their profits to a certain extent.


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