Las Vegas Sands (ticker: LVS) popped Tuesday, on news that China is somewhat relaxing its entry requirements for international travelers, a step that many hope will herald a fuller reopening for a nation that’s hewn closely to a zero-Covid strategy.
The thesis is a simple one. Las Vegas Sands gets a little over two-thirds of its business from Macau, with the remainder coming from its Marina Bay Sands (MBS) property in Singapore. The latter is an underappreciated asset that provides earnings visibility, while the former could see profits jump when Macau more fully reopens, following in the footsteps of Las Vegas and other U.S. cities, where gross gaming revenue has exploded above prepandemic levels.
“Macau was the fastest-growing market in the world…now you’re getting it almost for free when it should be worth about as much as Las Vegas Sands’ total market cap,” says Mark Giambrone, head of U.S. equities at Barrow Hanley Global Investors.
His math has the MBS location alone as worth $30 a share, at a time when the stock is trading at $34.51. Moreover, he argues that the company could earn close to $4 a share in a reopening scenario, up from $3.26 in 2019. Yet the stock hasn’t seen the boost that many of its travel peers have enjoyed. “That’s nuts to me.”
Of course, detractors would say it’s nuts to own a Macau-centric casino when so few people can go to Macau, and Las Vegas Sands is expected to post a per-share loss this year; consensus doesn’t call for EPS to approach $4 until 2025.
Yet Bryan Engler, a partner and portfolio manager at Kovitz Investment Group, goes further. He argues that MBS—“one of the most profitable pieces of property on earth”—could throw off close to $2.5 billion in earnings before interest, taxes, depreciation and amortization when fully reopened, compared with $1.7 billion in Ebitda prepandemic. That alone gets investors comfortably above the stock’s recent $30 to $32 range. Longer-term, he doesn’t think $5 billion to $6 billion in Ebitda is unreasonable.
“Predicting what the Chinese government will do is a fool’s errand…but Las Vegas Sands has a strong track record of excellent capital expenditures, a clean balance sheet, and some of the best gaming properties in the world,” Engler says. “Las Vegas Sands holds tons of optionality for a longer-term investor.”
Although the past few years have taught investors to expect the unexpected, it does indeed seem that it’s a matter of when, rather than if, Macau comes back to life.
The question is how long investors are willing to wait, given a reopening has been delayed repeatedly in the past, worrying even shareholders with a long horizon.
“We haven’t lost faith in the quality of the assets or the fortified balance sheet…and at the end of the day, quality is going to rise to the top,” says Kevin McCarthy, portfolio manager of Neuberger Berman Next Generation Connected Consumer NBCC –0.90% exchange-traded fund (NBCC). The firm had been trimming its position due to lack of near-term catalysts. “It’s just the timing of the situation.”
The timeline may have gotten a little shorter this week, given China’s decision to halve quarantine time for overseas travelers, although it’s premature to declare victory yet. In addition, investors may worry about other unknowns, like casino concession renewals later this year, which could further cloud the picture.
However, while its casinos have been largely idled, Las Vegas Sands has been anything but, renovating rooms to drive profits in years to come, signaling its ability to shepherd Macau toward becoming more of a family destination, and remaining on the right side of the government. As the region’s largest employer, it’s hard to imagine the goodwill it’s built up with the government won’t be paid back in some way.
Just as important is what Las Vegas Sands hasn’t done—namely tried to chase online gaming, which has been a money sink for many domestic companies.
The stock is also a way for investors to have access to China, a market that provides a nice hedge to recent U.S. volatility, without the risk of owning a Chinese listed security. And a top-notch management team comes as part of the package.
“One thing I really look for is businesses that have foresight and don’t’ get caught up in the flavor of the day; businesses that advance during periods of stress,” says Engler. “Las Vegas Sands has that in spades.”
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