When most people think about gambling, they tend to conjure up visions of Las Vegas, the undisputed center of U.S. gambling and the setting for myriad movies, television shows and other fictional mediums. Unfortunately, the city is still recovering from the aftermath of the recession.
The center of gravity in the casino space has shifted to Asia over the last decade. Given the region's faster growth and demographics, this should continue for the foreseeable future. The tiny enclave of Macau now produces multiples of annual gambling revenue compared to what Las Vegas generates.
Given this shifting dynamic, investors looking to allocate any funds to the casino sector should concentrate on those operators who are well positioned to benefit from the growing demand in Asia. Below is a profile of what I consider the best long-term play on fast growing gambling in the region: Las Vegas Sands (LVS).
Despite its name, the company derives the vast majority of its revenues and earnings from Asia. The company has a huge presence in Macau where it is a sub-concessionaire under one of three government-granted concessions to operate casinos in the enclave. It also opened a sizable property in Singapore in 2010. The company owns and operates The Venetian hotel (4,000 rooms) as well as the Palazzo Resort Hotel in Las Vegas.
According to the last monthly report available, Macau gambling revenue is up 17%, year-over-year, as the Chinese economy is improving and the government continues to lessen travel restrictions on its populace. The company's properties are seeing higher growth with traffic at Sands China up 34%, year-over-year, in August. Las Vegas Sands is working to develop additional casinos in Macau on approximately 200 acres, and this additional development will likely be a key growth driver.
The company could also benefit if Japan opens up to gambling, which seems like a decent probability given the new government's need for economic growth and tax revenue. Finally, the company should be bolstered as Vegas recovers. Las Vegas Sands will continue to profit from being a well-known name in Asia since one-third of Las Vegas gambling revenues is plunked down by Asian gamblers.
Las Vegas Sands recently settled a money laundering probe which put a headache behind it and remove some uncertainty for investors. The company also has substantial non-casino property assets, including high-end retail spaces. I have seen some estimates that put a $10 billion value on these properties. Shareholders could benefit if the company eventually sells these assets off or spins them off in a real estate investment trust (REIT) structure.
The stock sells for just under 20x forward earnings, which is reasonable given the company has tripled revenues since 2008 and has several core growth drivers ahead. The company has a strong balance sheet and pays a 2.1% dividend yield. Las Vegas Sands did not pay a dividend until 2012, when it initiated a $0.25-per-share quarterly dividend; the company paid a special dividend of $2.75 a share that year as well. It has already raised its initial dividend by 40% and I would look for dividend growth to be a core part of rewarding shareholders in the future.