The World's Best Casino Operator is Selling at an Attractive Price
Ted is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Casinos took a big hit during the recent global recession, after taking on too much debt in the run-up to the financial crisis. However, some casinos' struggles with high debt relative to cash flow is others' opportunity to establish a dominant position in the industry.
Las Vegas Sands (NYSE: LVS) is one casino that should be able to steal even more market share as casinos like MGM Resorts International (NYSE: MGM) pay down debt in lieu of expansion. Las Vegas Sands has a stronghold in Singapore and Macau in addition to its Las Vegas properties, and has plans to expand to other parts of the world. At its recent price of $51.14 per share, investors are paying for growth, but it could turn out well in the end as the company continues to grow internationally.
Dominant Competitive Position
Although the resorts offered by the major casino operators are largely a commodity product, Las Vegas Sands has still managed to carve out a dominant position in the industry. It has grown its way to a higher revenue figure than competitors MGM and Wynn Resorts (NASDAQ: WYNN).
Las Vegas Sands' advantage over MGM Resorts should only increase as the latter company focuses on paying down debt instead of adding new resorts to its portfolio. As a result, Las Vegas Sands is in a terrific position to take advantage of growth opportunities in Asia and elsewhere. It already has a 50% share of the market in Singapore, and is one of only six license holders in Macau. Improving its position in Asia will give it an enormous advantage once competitors have clean enough balance sheets to grow once again. In addition, the company's dominant position will create somewhat of a network effect, where its strong brand will give it an advantage in securing licenses in other parts of the world.
Tailwinds Will Boost Earnings
Las Vegas Sands' $1.3 billion in free cash flow in 2011 is remarkable given the slowdown in Macau and Las Vegas. A rebound in foot traffic at the Macau casinos will add to an already growing free cash flow output. Over the next five years, free cash flow will likely surpass operating requirements, possibly leading to a substantial hike in the company's dividend.
In addition to adding more properties in China, Las Vegas Sands is also looking to build a resort in Madrid. If the company can continue dominating new markets throughout the world, it can establish itself as the preeminent casino operator.
Of the companies in its peer group, Las Vegas Sands is the best positioned to grow EBITDA and free cash flow over the next five years. However, its stock price such that it requires investors to pay for a fair amount of growth. At a recent stock price of $51.14, the company needs to earn about $2.8 billion in free cash flow in order to meet expectations at a 15-times free cash flow multiple.
If at any time during the next five years it looks like the company's growth has been derailed, then the stock price could plummet. However, the company's dominant position in the markets in which it operates and its history of adding properties at a strong ROIC makes it likely that the company will achieve the market's growth expectations and probably beat them.
So while Las Vegas Sands isn't the cheapest casino available in the market, it may be the one with the highest potential.
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