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Best of Howard Stutz

Gaming Guru

Howard Stutz

Sands has hot quarter, but some analysts annoyed after call

8 May 2012

Sometimes, there's just no pleasing the investment community.

Las Vegas Sands Corp. announced April 25 it had blown apart Wall Street's first-quarter earnings projections. Buoyed by its holdings in Asia, the company became the first casino operator to ever report more than $1 billion in quarterly cash flow while collecting more than $2.76 billion in net revenues.

Two weeks earlier, Las Vegas Sands opened the first phase of its $4.4 Sands Cotai Central in Macau. During the quarterly conference call, Las Vegas Sands Chairman Sheldon Adelson offered a few details on the company's plans to build a gambling resort complex in Spain.

But analysts wanted more color.

"Investors were hoping for a greater level of disclosure on the impact of table hold, early trends at Sands Cotai and greater clarity on Spain," Nomura Group gaming analyst Harry Curtis wrote in a research note. "We sense that Las Vegas Sands was defensive in discussing these topics. The tone of (the) earnings call at best can be described as contentious."

Janney Montgomery gaming analyst Brian McGill said Las Vegas Sands was being coy about its results from the Marina Bay Sands in Singapore.

"The company did not want to give a hold-adjusted cash flow number," McGill said. "Adjusting for hold, we estimate the results still came in higher than our expectations by approximately $10 million to $15 million."

Still, despite some touchiness on the conference call, Las Vegas Sands remains the equity markets' darling because of its continued growth potential, both internationally and in U.S. markets.

Cotai Central includes a 600-room Conrad hotel and a 1,200-room Holiday Inn, along with casinos, retail, dining, convention space and other entertainment amenities. A 4,000-room Sheraton is expected to open in March. Las Vegas Sands is also hoping to receive Macau approval to build on an additional Cotai site.

Meanwhile, Las Vegas Sands is in play for gaming developments in Japan and Korea, as well as Spain, where a $22 billion project -- tentatively called EuroVegas -- would include four 3,000-room hotel-casinos and be constructed over a nine-year period in either Madrid or Barcelona.

"To be clear, Las Vegas Sands had a very good quarter," Curtis said. "We don't understand why management was so defensive."

So what's all the fuss about?

"Our point of view is that hold adjustments are a valid analytical tool over a 90-day period (and) if early results at Sands Cotai were exceptional, management would have said so," Curtis wrote. "The potential returns in Spain remain an uncertainty, and investors don't like uncertainty."

Credit Suisse gaming analyst Joel Simkins said Las Vegas Sands investors might have concerns about Spain, but the project is at least three or four years down the road.

Several analysts said company executives were vague in explaining how Las Vegas Sands could achieve a 20 percent return on investment in Spain.

Simkins said the company has few competitors with the same growth opportunities on a global basis.

"While Las Vegas Sands received many questions on hold percentage and plans for Spain, we believe there are few areas for investors to pick at," Simkins said. "Long-term investors should focus on the big picture as opposed to getting too lost in the weeds of sequential and short-term changes in the business."

The company's quarterly numbers showed impressive percentage increases from a year ago; net income gained 118.7 percent while earnings per share jumped 117.9 percent.

The surprise, however, came out of Las Vegas, where The Venetian and Palazzo hotel-casinos grew net revenues by 26 percent and casino revenues by 91 percent. Strong baccarat play drove table game wagering up almost 28 percent.

The numbers from the Strip were strong, but investors are squarely focused on Asia, which accounted for 83 percent of the company's overall quarterly revenues; $1.45 billion of the total came from Macau and $848.7 million was derived from Singapore.

"From here, we believe that Las Vegas Sands' near-term catalyst is the ramp of Cotai Central," JP Morgan gaming analyst Joe Greff told investors. "We believe a more significant market share gain will take place when phase two opens in the third quarter."

Even the Marina Bay Sands, where revenues increased 45 percent and adjusted cash flow jumped 66 percent, had critics.

Stifel Nicolaus Capital Markets gaming analyst Steven Wieczynski said lingering growth concerns could further perpetuate negative sentiment in the near term.

"We encourage investors to keep the relative newness of the Singapore market in mind when assessing its prospects and performance to date," he said.