Las Vegas Sands (LVS) - Excessive Debt, Dissapointing Profits
Earlier this week, Las Vegas Sands (LVS) reported statistics for its fourth quarter. The company saw revenues increase to $1.05 billion but adjusted earnings per share came in t a very disappointing 0.20. While the stock was up as much as 15.2% during the day, I saw very little in the report to get excited about. In fact, some of the issues brought up were downright sobering. It is amazing to see management’s ability to put a positive spin on things and at least initially, the market bought the story that everything is continuing as planned and growth continues to be just over the horizon.
Digging into the numbers it was quite disturbing to see that casino revenues were down across the board from Las Vegas to Macao. While the same period from last year included an unusually high win rate, it is still shocking to see that casino total revenue is down despite the fact that the company has increased the number of tables in use significantly. Furthermore, the win rate was still above what the company guides as a “normalized rate” which implies that moving forward we will likely see further erosion in this area.
Infrastructure is an issue that most US companies do not have to worry about as much, but it is vital to LVS to secure transportation ability in order to be able to move traffic to their locations. While progress is being made, there continue to be significant challenges in getting permits for ferries to run not to mention bridges built and utilities provided. With China still falling somewhat into the socialist category, it is uncertain just how well negotiations will hold up with Chinese officials and whether agreements will be honored down the road once LVS has made significant investments. Once the Olympics are complete, it will be a critical time period for those operating in China to determine exactly how much things have changed from the traditional mindset.
Another important issue is the exclusivity LVS has enjoyed in Macao. It appears that additional competitors are beginning to appear on the island and this causes concern for property valuation. LVS plans to sell the mall it has developed sometime in the next year. Up to this point the company has been concentrating on getting vendors into the retail space and developing the property into a cashflow positive endeavor. If other retailers are allowed to build properties, the current mall value will decline because they no longer have a monopoly on this business. The decline could set the company back in raising cash to begin to tackle the huge mountain of debt they have been acquiring.
Speaking of debt, the $7.57 billion dollar liability is becoming larger every quarter. In the fourth quarter alone, the company spent another 1.07 billion in capital expenditures. Interest expense nearly doubled over the last year and came in at $83m for the fourth quarter. That dwarfs the company’s earnings for the quarter raising questions about what might happen if revenues hit a soft spot and the company still had such a high debt service liability. The interest expense item was buried on page four of the press release but is one of the primary reasons I am concerned about the stock. Further building projects are well underway and there is no doubt that capital expenditures for the first quarter will continue to be astronomically high. And finally, what happens if the company reaches the end of its available credit line? Will they issue stock to raise capital and thus dilute the current shareholders? I think it is a definite possibility and one that would cause the stock to decline sharply.
Although the stock reacted positively to the announcement, it very quickly gave back much of its gains. The subsequent decline is likely due to investors beginning to chew on the above mentioned debt and expense concerns. The stock still maintains a negative pattern and appears likely to test if not break through the lows from earlier this year. I am viewing the strength as a chance to short the stock and would caution those holding long positions to be very careful with how much risk they are willing to take with this name.
FD: Author has a short position in LVS
Additional Reading:
ZACK i opened large CHIPOTLE-B long position in 85s. this is 35% below the high point of $130 and 45% below the A shares high point of $155, even though the eps is the same. yesterday there was a downgrade from Raymond James which seems to have deepened the dip by $10-$15 and sweetened long potential. I disagree with the downgrade and it was mixed in with an upgrade on laggard high cost Mortons of CHicago making it more suspect. my other long of significant optomism is Jetblue-jblu. everyone hates airlines so you might be brainwashed with the others. Boris.
February 7th, 2008 at 3:07 pm