Las Vegas Sands (NYSE: LVS), the world's largest casino operator, shed about a fifth of its value over the past three months amid concerns about its slowing growth, the escalating trade war, the depreciating yuan, and ongoing protests in Hong Kong.
But after that drop, Sands' low forward P/E of 16 and high dividend yield of nearly 6% might look tempting to income investors. However, I think Sands remains a losing bet, and that it could head lower for five simple reasons.
1. Macau's growth has wavered
Las Vegas Sands generated 61% of its adjusted property EBITDA from its five Macau properties and ferry operations last quarter. Macau's gross gaming revenue (GGR) -- what gamblers bet minus what they win -- stayed robust throughout 2018 with eight months of double-digit growth, but that growth stalled out this year.
|Month (2019)||Macau GGR (in billions of Macanese pataca)||Year-Over-Year Change|
This year's weakness can be attributed to the economic slowdown in China (exacerbated by the trade war), lower spending from VIPs and via junkets amid tighter regulations, and disruptions to traffic thanks to protests in Hong Kong.
Sands' Macau properties still generated stable growth last quarter, as their total revenue and adjusted property EBITDA rose 1% and 2% year-over-year, respectively. However, these resorts are running out of room to grow, and the sluggish growth of the Macau gaming market indicates that Sands needs to compete more aggressively against rivals like Wynn, which could weigh down its margins.
2. Hong Kong has issues
Hong Kong protesters recently occupied its airport and caused hundreds of flight cancellations. Sands owns the ferry terminal that links Hong Kong to Macau, and declining visits to Hong Kong (which fell by the double digits in July) means fewer visits to Macau.
Sands also previously said that the new Hong Kong/Zhuhai/Macau bridge would bring more visitors to its properties via cars and shuttles, however, individual permits for the bridge are still mostly limited to shipping, business, and government vehicles. Most regular visitors need to board a licensed bus to cross the bridge, which often requires more time than simply taking the ferry.
Unless these things are remedied, Macau's gaming numbers will continue to decline and torpedo Sands' biggest growth engine.
3. Sands is a prime target for a trade war retaliation
Sands CEO Sheldon Adelson is one of President Donald Trump's biggest political donors and backers. As a result, Sands is perhaps in a delicate position as the Trump administration ramps up its trade war against China. The Chinese government might think it could wield leverage over Trump by revoking Sands' licenses in Macau, which would lead to a worst-case scenario.
4. Not enough exposure to Las Vegas
Macau was once the hottest growth market in gaming, but Las Vegas is warming up again. That's why the adjusted property EBITDA at Sands' Vegas properties soared 77% annually to $136 million last quarter, marking the region's strongest ever growth.
Unfortunately, Sands' Vegas properties only accounted for 12% of its total adjusted property EBITDA, which won't be enough to offset potential declines at its properties in Macau or Singapore, which accounted for the remaining 88%.
Macau's stagnation, the growth of Vegas, and the trade war arguably make MGM Resorts, which generates most of its revenue from Vegas, a more stable casino play than Sands. That's probably why shares of MGM advanced about 10% over the past three months as Sands' stock tumbled.
5. Sands' dividend looks unsustainable
Sands' dividend looks tempting, but it used up 155% of its earnings and 146% of its free cash flow over the past 12 months. Those massive payout ratios aren't sustainable, and its free cash flow will keep declining as it allocates more cash toward new multibillion-dollar projects in Macau, Singapore, and potentially Japan.
If Macau runs out of steam, Sands' free cash flow could dry up quickly and result in an abrupt dividend cut -- which makes it a risky bet for income investors.
The bottom line
I once owned shares of Las Vegas Sands, but I sold and took profits last August due to many of the aforementioned concerns. I might consider buying Sands again if trade tensions wane and the Hong Kong protests end, but those unpredictable headwinds make it tough to recommend buying right now.
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