Las Vegas Sands (NYSE: LVS), the biggest casino operator in the world, recently posted solid third quarter numbers that topped analyst estimates. Its revenue rose 7.7% annually to $3.2 billion, beating estimates by $50 million, while its adjusted EPS grew 8.5% to $0.77, topping expectations by $0.09.
That report propelled Sands' stock back toward its 52-week high, and it's now up 23% year-to-date. Should investors expect even better performance next year, or will the stock stall out? Let's examine Sands' biggest strengths and weaknesses to find out.
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Sands' greatest strengths
Las Vegas Sands was the first US casino operator to expand into Macau, and that first mover's advantage paid off. Its five Macau properties -- Sands, Venetian, Plaza, Sands Cotai Central, and the Parisian -- generated 54% of its adjusted property EBITDA last quarter. That figure rose 4% annually last quarter. On a hold-normalized basis, it improved 11%.
Revenues fell at the Venetian, Sands, Sands Cotai, and Plaza, but that softness was offset by double-digit sequential sales growth at the Parisian, which opened last September. The Venetian and Sands Cotai were also able to lift their average RevPARs (revenue per available room) to soften the blow of weaker casino revenues.
Macau's regional gaming revenues already rose year-over-year for 15 straight months. Lionel Leong, Macau's Secretary for Economy and Finance, expects the region to finish the year with "positive double-digit growth" over 2016. Moreover, Leong believes that "gaming revenues will be even higher" next year.
Marina Bay Sands in Singapore also remains strong, with its adjusted property EBITDA rising 13% annually (11.4% on a hold-normalized basis) and accounting for 36% of Sands' total during the quarter. Sands also plans to expand further into Asia with a new resort in Japan. That $10 billion project could turn into another major stream of revenue over the long term.
Meanwhile, Sands remains a reliable income generator with a 4.6% forward yield. Its payout ratio of 112% might seem high, but it spent just 89% of its free cash flow on that dividend over the past 12 months. Sands has hiked that payout annually for four straight years.
Sands' biggest weaknesses
The biggest problem for Sands is the growing competition in Macau, as rivals like Wynn Resorts (NASDAQ: WYNN), MGM Resorts (NYSE: MGM), Melco (NASDAQ: MLCO), and SJM open new properties near the highly competitive Cotai Strip area.
The bears will argue that Sands' only real growth engine in Macau is the Parisian, while its other properties are actually ceding market share to rival properties like the Wynn Macau and Wynn Palace Cotai.
They'll also argue that Sands' heavy exposure to Macau is a long-term liability, since its lucrative market of VIPs has been repeatedly targeted by the Chinese government in anti-corruption and money laundering crackdowns.
VIPs accounted for 11% of Macau's total gaming revenues in the first three quarters of 2017, compared to 10% in the previous year. Mass table revenues accounted for 49% of that total, down from 50% last year.
The US market, which generated 10% of Sands' adjusted property EBITDA last quarter, also remains challenging. Adjusted property EBITDA at its Vegas properties fell 11.6% annually (rising 2.3% on a hold-normalized basis) due to lower RevPAR and gaming revenue. Sands Bethlehem in Pennsylvania fared better with positive growth, but the company is trying to sell the property due to an uncertain outlook for the state's gambling industry.
Analysts expect Sands' revenue and earnings to respectively rise 11% and 22% this year, but that momentum could wane next year with just 2% sales growth and 6% earnings growth. That slowdown is mostly attributed to uncertainties about the competition in Macau and its softness in Vegas.
So will 2018 be a good year for Las Vegas Sands?
Sands' future depends on the staying power of the Parisian and the ability of its other Macau properties to generate positive revenue growth again amid rising competition from rival resorts. I think Sands is still the best player in the region since it controls the heart of the Cotai Strip with its properties, but I think 2018 could be tougher than 2017 -- even if gaming revenue growth in Macau accelerates.
Sands remains a great long-term hold, and the stock isn't expensive at 22 times forward earnings, which is lower than Wynn's forward P/E of 23 but slightly higher than MGM's multiple of 19. However, investors expecting Sands to surge to fresh highs in 2018 could be disappointed.
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