Amid still lingering travel restrictions and the specter of increasing government oversight in Macau, Las Vegas Sands (NYSE:LVS) stock is scuffling, but some in the investment community believe the shares can rally over the next 12 months.
Acknowledging that the delta variant of the coronavirus pandemic is hindering some travel and leisure equities and that the consumer discretionary sector — where gaming stocks reside — could be pinched by a 2022 interest rate hike by the Federal Reserve, Deutsche Bank places Las Vegas Sands on its list of 27 best equity ideas for the next 12 months. The bank says a combination of negative factors is creating opportunity in LVS stock.
We believe the confluence of these events have created a favorable risk-reward, most notably for longer term oriented investors, but we also believe further details on the new Gaming Law, which we expect to come forth in the 4Q21, are likely to provide much needed clarity, which we believe will be beneficial for shares at current levels,” said the bank.
While shares of companies with exposure to the Las Vegas Strip and locals markets and regional casino portfolios are mostly surging this year, the opposite is true of LVS. Now entirely dependent on Macau and Singapore, Sands is off almost 36% year-to-date.
LVS Stock Has Supporters, Potential Catalysts
When Macau gaming stocks were drubbed last month following release of the special administrative region’s (SAR) new gaming consultation policies, some investors bought the dip in Sands, indicating they see it as a low-risk value proposition.
Officials in the world’s largest casino hub are spooking investors by proposing reforms that could include gaining mmore equity in the gaming companies, exert more control over day-to-day operations, and wield more influence on companies’ capital expenditures, including dividend payments. A local law firm recently said there’s no precedent for the SAR government to regulate dividends paid by the six concessionaires, including Sands.
LVS faces the added drag of being a US-based company. Regarding potential renewal risk, Moody’s points to the three US-based Macau operators — LVS, MGM, and Wynn — citing “uncontrollable geopolitical issues.” However, the research firm doesn’t say that risk is alarmingly high, and some executives remain optimistic that their companies will continue doing business in the SAR.
Even with all the controversy and headwinds in Macau, its largest market, LVS remains positive on the basis of earnings before interest, taxes, depreciation, amortization, and restructuring or rent costs (EBITDAR), according to Deutsche Bank.
Risk/Reward with LVS Stock
While LVS has the look of a value play, there are some risks to consider.
“Downside risks: 1) an inability to forecast, within reason, the shape of the demand recovery, 2) a greater-than-expected impact from competitor openings on Cotai over the next 18 months, 3) unfavorable Government policies in the aftermath of the COVID-19 pandemic, and 4) general macroeconomic / geopolitical risks that go beyond what is currently contemplated in our estimates,” says Deutsche Bank analyst Carlo Santarelli.
On the other hand, reward with the stock could be substantial as Macau travel trends normalize and regulatory risk ebbs. Market observers believe it’s unlikely the government there won’t renew concessionaires’ permits. In the case of Sands, it’s the largest operator in the SAR with five integrated resorts, meaning replacing a company of that stature is easier said than done.
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