Shares of Las Vegas Sands (NYSE: LVS) have fallen more than 15% over the past three months due to ongoing concerns about Macau, its largest market. Tighter regulation of casino and junket operators, an anti-corruption crackdown in China, and a nationwide economic slowdown have all darkened Sands' outlook.
Sands' four Macau properties and Singapore's Marina Sands all posted year-over-year revenue declines last quarter. That weakness caused its total gaming revenue to fall 13% annually. Revenue rose 2% in Las Vegas, but those properties only generated 14% of Sands' sales and couldn't offset its declines in Asia. Total sales fell 10% to $2.72 billion, missing expectations by $160 million. Adjusted net income plunged 33% to $357 million, or $0.45 per share, missing estimates by $0.17.
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Sands' free cash flow position might improve after the opening of the Parisian boosts its room count by 31% in the second half of the year. However, Sands plans to build two more properties on the Cotai Strip and is considering opening new resorts in Japan and South Korea -- which will all cause FCF levels to drop. Therefore, I wouldn't be surprised if Sands followed Wynn's lead and slashed its dividend.
Plenty of headwinds, not enough tailwinds
Macau Chief Executive Fernando Chui estimates that total casino revenues in the region will fall to $25 billion in 2016, its lowest level since 2010. But as that market shrinks, rivals like Wynn, MGM, Melco Crown , and Galaxy are all opening new properties. With more companies fighting over a smaller market, Sands' top and bottom lines will inevitably decline.
Nomura Securities analyst Richard Huang recently warned that soccer fans staying home to watch Euro 2016 could cause June gaming revenue to tumble to a 5-year low. A recent Morgan Stanley survey of 1,000 Chinese gamblers also found that 30% might visit Macau less after Disney 's Shanghai Disney opens. The same survey found that 26% of respondents would gamble more in Macau just because they wanted to visit the new Wynn Palace -- which could pull traffic away from Sands' Parisian. But on the bright side, Morgan's poll found that Sands' Venetian remains the most popular casino in Macau, with 46% of respondents planning to visit.
The verdict: Ignore Las Vegas Sands
Las Vegas Sands might catch the eye of investors looking for stocks trading with below-industry average multiples and high dividend yields, but the headwinds facing the casino operator won't dissipate anytime soon. Therefore, Sands might look cheap, but investors are probably better off ignoring it for now.
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