After going through the public consultation procedure, the Macau Gaming Bill is under discussion by the members of the legislative assembly. The draft bill proposes six concessionaires with a maximum term of ten years. The uncertainty surrounding the number of casino licenses led to a deep contraction in Las Vegas Sands stock (NYSE: LVS). Given the favorable directives in the draft bill, LVS stock has gained 15% since early January, and Trefis believes that the rally is likely to continue despite the ongoing weakness in Macau’s gaming industry. The company incurred just $1.6 billion of operational cash burn in the past two years, supported by effective cost control and capital preservation measures. Per Q3 2021 filings, Sands has $14.5 billion of long-term debt on its balance sheet with $7.6 billion, almost 50% of total debt, related to the construction, renovation, and other financing activities in Macau. Moreover, Sands’ Macau-related debt has a maturity profile spread over the coming decade. We highlight the trends in revenues, earnings, and stock price in interactive dashboard analysis, Las Vegas Sands Valuation.
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Below you’ll find our previous coverage of Las Vegas Sands stock where you can track our view over time.
[Updated 2021/12/30] – Will Tides Turn For Las Vegas Sands Stock?
Since March, the shares of Las Vegas Sands (NYSE: LVS) and Penn National Gaming (Nasdaq: PENN) have observed a deep contraction after observing a strong rally in the first quarter. While the anticipation of increased regulatory oversight has led to pessimism in Las Vegas Sands stock, the shares of Penn National Gaming observed a broad-based correction along with other sports betting stocks. Interestingly, Sands and Penn have comparable assets and long-term debt on the balance sheet, despite a sizable difference in revenues. Considering Las Vegas Sands’ higher profitability, significantly lower market capitalization, and effective cost control measures limiting cash burn, Trefis believes that it is a good pick to realize capital gains. On the contrary, Penn stock reached historical highs in March as investors speculated on market share gains of its sports betting application, Barstool. We compare a slew of factors such as historical revenue growth, returns, and valuation multiple in an interactive dashboard analysis, Las Vegas Sands vs. Penn National Gaming: Industry Peers; Which Stock Is A Better Bet? (related: Las Vegas Sands Stock Is A Steal)
- Revenue Growth
Penn National’s growth was much stronger than Las Vegas Sands before the pandemic, with PENN’s revenue expanding at an average rate of 20% per year from $3 billion in 2016 to $5.3 billion in 2019, versus Las Vegas Sands’ revenues which grew at an average rate of 7% per year from $11.2 billion in 2016 to $13.7 billion in 2019. Due to the pandemic, both companies observed a steep contraction in their top line as travel demand and discretionary spending declined.
- Penn National’s key services including gaming, food & beverage, hotel, racing, and other, contribute 81%, 10%, 6%, 1%, and 3% of total revenues, respectively. The company’s gaming business observed strong growth in recent years primarily driven by multiple acquisitions. Notably, the company earns nearly 90% of gaming revenues from slot machines which have a casino win rate of 7%.
- Penn National Gaming remains committed to the long-term success of its sports betting application with a target to achieve a leadership position in all states. Currently, Barstool contributes less than 1% of the total revenues and is expected to reach meaningful levels by 2023.
- Before the pandemic, Sands’ Macau, Vegas, and Singapore properties accounted for 63%, 15%, and 22% of total revenues, respectively. The company’s Macau business was observing strong growth assisted by new property openings, mass-market gaming wagers, and rising tourist inflow. As temporary property closures led to operating losses, the company completely shifted its focus on high-growth Asian properties by announcing the sale of its Vegas resort during the first quarter.
- Currently, the proposed changes in Macau’s gaming law are suspected to affect the operations and capital return policies of all concessionaires. Thus, Sands is likely to observe a headwind as its long-term growth plans focus on Asia and particularly Macau.
- Returns (Profits)
Coming to returns, Sands has reported a much higher operating profit margin and net margin than Penn National Gaming. In 2019, Sands and Penn reported an operating profit margin of 27% and 11%, respectively.
- Being a leading integrated resort operator, Sands has a well-established capital return policy. The company’s net income margin of 20% has been key to regular dividend payouts and stock repurchases. In 2019, Sands reported $13.7 billion of net revenues and $3 billion of operating cash flow at an operating cash flow margin of 22%. The company returned $3 billion as dividends to shareholders and managed $1 billion of capital expenses from property sales.
- Similarly, Penn National reported $2.3 billion of total revenues and $704 million of operating cash flow at an operating cash flow margin of 30% in 2019. The company utilized $608 million of operating cash on property, plant & equipment and acquisitions. Notably, the operating cash flow margin observed a jump in 2019 due to impairment charges.
Per recent filings, Sands reported $14 billion of long-term debt, $2.4 billion of total equity, and $20 billion in total assets. Whereas, Penn National reported $11 billion of long-term debt, $3 billion of total equity, and $16 billion in total assets. Las Vegas Sands has a higher financial leverage than Penn National Gaming.
- Despite a prolonged slump due to the coronavirus crisis, Sands did not incur sizable impairment charges but Penn National Gaming reported a $623 million impairment charge in 2020.
- While higher financial leverage leads to higher cash burn during a downturn, Sands’ stringent cost control measures limited operating cash burn to just $1.3 billion in 2020.
- Comparing Sands’ $13 billion in revenues with Penn National’s $5.3 billion, Penn National’s nearly comparable long-term debt obligations are likely to be a drag on shareholder returns.
- Considering a scenario where business in Macau and Singapore return to normal by mid-2022, Sands’ high margins will generate more cash than Penn National Gaming. In our previous article, Should You Bet On Las Vegas Sands Stock After The Historic Announcement?, we highlight the importance of Sands’s Singapore and Macau properties’ EBITDA margins.
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