Las Vegas Sands Shares Get Grinded

A competing casino venture's IPO has sent shares sinking, but the selloff may be overdone.
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Shares of Las Vegas Sands (LVS) - Get Report have dropped nearly 20% over the past two weeks, likely due to profit-taking and concerns about overvaluation. On Wednesday, media reports about a planned Macau casino IPO from a competitor spurred the negativity.

But given the lack of any changes in the company's fundamentals and its continued growth prospects, the selloff may have been overdone.

Before the recent slowdown, shares of Las Vegas Sands were on fire as investors grew excited over the growth prospects at the company's existing casinos and future developments in Macau and Las Vegas. The stock jumped from about $29 in November to a 52-week high of $73.14 on May 11.

However, the stock fell about 8% Wednesday, to $60.10, after several media outlets reported that Australia's

Publishing & Broadcasting

and Hong Kong-based

Melco International Development

are planning to offer about 20% of their Macau casino joint venture to the public, floating a roughly $1 billion stake. The IPO would be listed on the Nasdaq in the second half of this year, according to the reports, which cited anonymous sources.

The venture is developing two casino sites in Macau and recently bought a third property. Macau, located near Hong Kong, is the only area of China in which casino gambling is legal. The region is projected to eventually surpass Las Vegas as the world's largest gaming market.

The idea being floated around trading desks is that the IPO could hurt Las Vegas Sands because it brings yet another Macau option for investors' dollars -- especially since the new IPO would be a "pure play" on Macau. Currently, investors have three options for playing the Macau market. Las Vegas Sands is the only American company that has a casino open there today, but

Wynn Resorts

(WYNN) - Get Report

and

MGM Mirage

(MGM) - Get Report

both have exclusive permits to open casinos in the region.

But one U.S. analyst, who spoke on the condition of anonymity based on restrictions placed on his firm concerning the stock, said the fears about a new investor option might be unwarranted, since hedge funds -- many of which invest in Las Vegas Sands and other gaming stocks -- can already buy Publishing & Broadcasting on the Australian exchange or Melco on the Hong Kong market.

Stephen Holzman, managing partner of hedge fund Vantis Capital Management, points out that the news doesn't represent new competition for Las Vegas Sands' Macau property.

"The only thing that appears new is that they're going to access the U.S. capital markets," says Holzman, whose fund owns Las Vegas Sands.

He says the stock shakeout may be due to the "scarcity value" dropping for the stock. This theory can be illustrated by thinking back to the late 1990s, when there were only so many Internet stocks. Once Wall Street had financed hundreds of such companies, the scarcity value was lost.

"I'm of the opinion that the fear factor is overdone ... and that Macau will be enormous (for Las Vegas Sands)," Holzman says. "I think that it's got great growth potential ... and it's worth owning at these prices." He believes that the company's revenue should be able to grow 30% annually over the next few years.

Half of the company's current earnings before interest, taxes, depreciation and amortization comes from Macau, with the rest coming from Vegas. Las Vegas Sands currently has only two casinos in operation: the popular Venetian Resort in Las Vegas and the Sands Macau.

"The story of the company, however, is rooted in its $8 billion in developments and the value the developments will bring to the table," wrote Jefferies & Co. gaming analyst Lawrence Klatzkin in a recent research note. "We continue to see tremendous value in this company." Klatzkin, whose firm provides investment banking services to the company, rates the stock a buy with an $80 price target.

Las Vegas Sands has a plethora of development opportunities set to be delivered over the next five years in Las Vegas and Macau, including malls, casinos, hotels and residential units. The company also is among the contenders for the first-ever gaming license to be granted by the Singapore government later this year.

As well, it doesn't appear that any Wall Street analysts are currently providing any added value for the company's 1,300 acres of land on Hengqin Island, which is near Macau. The Chinese government provided the land for free (choosing instead to tax it down the road). The agreement is subject to conditional approval by mainland Beijing. Once the approval becomes final, analysts will have to start plugging in values for that land.

The company, for its part, has said it could use the land for as much as 20 million square feet of luxury residential space -- representing future revenue in the tens of billions of dollars by the company's account, Klatzkin says.

Klatzkin currently assumes no future earnings from that project, but still estimates that the company will report 2008 EBITDA of $2.1 billion, up from $586 million in 2005. About 67% of the company's 2008 EBITDA will come from Macau, Klatzkin says.

According to Thomson First Call, analysts, on average, expect the company's earnings per share to grow by 15% this year and 43% in 2007.

Granted, the Publishing & Broadcasting and Melco IPO, if it happens, will be a pure-play on Macau, and the fact that it's trading in the U.S. market means it will reach a far wider investor audience than any Australian or Hong Kong-based companies. But at the same time, the recent Las Vegas Sands pullback may provide an attractive entry point on the stock.