Thursday, November 1, 2007

China can't save Las Vegas Sands (LVS) - It's Getting "Croxed"

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The conventional wisdom of late is buy anything related to China and you will be rich. Any company even within a whiff of China, is bullet proof. When you talk to investors and they hear the word China it is sort of like when Charlie Brown's teacher starts talking.

This is a typical conversation: "So I have this stock... and it has some exposure to China... and (Charlie Brown's teacher's voice here)"

Nothing else matters once you get the words 'exposure to China' out. You could complete the sentence with "and Jessica Alba wants your phone number" but by that point said investor's eyes have glazed over in a semi comatose daze.... China.... China.... China. It is hard to talk any sense into people and the stock charts are proof that sense does not work in this arena. And this from a (long term) China bull.

Two of the US gaming companies are proof of this. Las Vegas Sands (LVS) and Wynn Resorts (WYNN) have 'outperformed' (I say that lightly) due to their exposure to Macau. I wrote a piece in early October 'A Top in Casino Names? Wynn and Las Vegas Sands' which was essentially a thesis on the very shrewd Steve Wynn issuing a secondary offering to raise a lot of cash in the Chinese related mania. The proposal was he saw investors were acting with emotion and little sense and he was going to take advantage of them. Hence this marked a near term top. I wrote

Now I am not saying these companies are going to go to dust - no way Jose. Wynn Resorts and Las Vegas Sands are going to continue to be great long term opportunities, but these near term rises in share prices have turned the risk/reward ratio firmly in the hands of the "RISK" in my opinion. And I think Wynn might be signaling this to us as well.

Las Vegas Sands (LVS) showed its not so easy as snapping your fingers, saying China and make billions overnight. In fact the company reported a quite limp earnings report
  • The company said its third-quarter adjusted profit fell 65% to $41.8 million, or 12 cents a share. Analysts, on average, expected earnings per share of 31 cents, according to Thomson Financial.
  • The company, which in August opened its massive new Venetian Macau casino, said revenue rose 19.5% to $661 million. That missed the $783 million that analysts expected.
  • The drop in earnings was mostly due to increased operating costs and a lower table games win percentage, Las Vegas Sands said, along with higher depreciation and interest charges.
  • Including all items, the company swung to a loss of $48.5 million, compared with profit of $97.3 million a year ago. The loss came amid increased pre-opening expenses and operating costs.
  • The Venetian Macau, open for just a month during the quarter, added $150 million to revenue.
  • Revenue at the Venetian in Las Vegas was flat, while revenue at the Sands Macau fell 12%.
That last phrase is the one that shocked me - you mean in the biggest market in the world with the emerging middle class a casino actually had 12% reduced revenue? How is that possible? Well the early betting (pardon the pun) is that it was just an unlucky (pardon the pun) quarter - and the house did not win as much as usual. Or perhaps Sands Macau was cannibalized by Venetian Macau? But if this is such an opportunity wouldn't there be enough room for both?

Now don't get me wrong, in the long run, having an exclusive right to print money in the fastest growing economy in the world is a major bull theme for Las Vegas Sands (and Wynn). But this obsession with anything Chinese seems to ignore the fact, nothing goes straight up, and business is not so simple as rolling out a red carpet and counting cash.

Let's see how that call from not even 30 days ago for a near term top in these names was.
  1. The day before I wrote my piece Wynn Resorts was $170 (up from $100 just 60 days earlier). The stock immediately fell to $145 and has been range bound in $145 to $160 area until its pre-earnings run the past few days, where it spiked to $175. After dropping to $155 today it is down to $143 in after hours on the LVS news. 16% down from where I made the call and more than 20%from where it stood 4 days ago.
  2. The day before I wrote my piece Las Vegas Sands was $145, up from $95 a few months before. The stock has a similar pattern to Wynn, trading in a range of $125 to $145 all of the past month. In after hours it's getting "croxed" down 15% to $106. 37% loss from peak when I made the call, and also from that same level 4 days ago. Almost a full round trip to that original $95. Before the mania of China hit.
So it looks like Wynn made a nice call - he sold when the going was best. Into the top of a (near term) mania.

So what are some lessons we can take away from this. First, anyone who tells you the the market is at all rational has not been in the market for very long. Second, when the momentum lemmings come visit your stock, take some off the table - eventually it will end bad. Third, many times we sell "early" to these lemmings and feel bad when the stock continues onward and upward, further detached from any reality. (I know this happens to me a lot) While that stinks, results like this (and Crocs yesterday) show it's ok to leave some profits on the table to protect your capital. Fourth, China doesn't solve everything. Or at least not in the near term. There is still business realities. Sometimes when I read analysis I believe there must be a world of unicorns and 4 leaf clovers (and smog) once you cross the national border into China. Certainly the world's investors believe that. I'm still wondering what happens if China "slows" to 7-9% GDP growth from 11%+; are people ready for that sin? Are markets priced for it?

Anyhow, I am seeing similar froth in solar stocks, drybulk shippers, and just about any Chinese stock. Doesn't mean you cannot keep trading them and making money or that they cannot continue upward even further detached from any sense. But earnings season has a bad habit of putting reality back in front of dazed and confused (Charlie Brown Teacher listening) investors. So tread carefully - understanding this is an enormous long term opportunity but nothing goes straight up. Although it's been close the past 2 years.

Now relative to these stocks, Las Vegas Sands may actually be a somewhat decent buy in the mid term - I will have to investigate further and see why they had such weak results at Sands Macau when the whole reason these stocks are levitating is their Macau exposure.

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