Will Las Vegas Sands Stock Climb The Ladder Again?

The shares of Las Vegas Sands (NYSE: LVS) and Penn National Gaming (NASDAQ: PENN) have observed a deep contraction after observing a strong rally in Q1 2021. Anticipation of increased regulatory oversight in Macau was the key cause of pessimism in Las Vegas Sands stock, but geopolitical tensions, skyrocketing inflation, and China’s adherence to a stringent pandemic response is adding to the fire. For Penn, high competitive rivalry in the U.S. sports betting and iGaming market is favoring bears. Barring the current volatile environment, Las Vegas Sands has a stronger balance sheet, better profitability metrics, and a leadership position in Macau’s mass gaming market. On the contrary, Penn’s sports betting application Barstool is also gaining popularity in the U.S. Given the low intensity of competitive rivalry faced by Las Vegas Sands, Trefis believes that it is a better pick to realize long-term gains. We compare a slew of factors such as historical revenue growth, returns, and valuation multiple in an interactive dashboard analysis, Las Vegas Sands vs. Penn National Gaming

PENN
: With Return Forecast Of 223%, Las Vegas Sands Is A Better Bet

Revenue Growth

Penn National’s growth was much stronger than Las Vegas Sands before the pandemic, with Penn’s revenues expanding at an average rate of 20% per year from $3 billion in 2016 to $5.3 billion in 2019, versus Las Vegas Sands’ revenues which grew at an average rate of 7% per year from $11.2 billion in 2016 to $13.7 billion in 2019. Penn’s revenues completely recovered to pre-pandemic levels in 2021 after observing a steep decline a year ago. However, Sands is observing a continued slump due to ongoing Covid-related restriction measures in China and Macau.

• Penn National’s key services including gaming, food & beverage, hotel, and other contribute 84%, 5%, 4%, and 7% of total revenues, respectively. In recent years, the company’s topline expansion has been fueled by multiple acquisitions. Notably, slot machines contribute nearly 90% of gaming revenues, which have a casino win rate of 7%.
• Penn National Gaming is committed to the long-term success of the sports betting application, Barstool. In 2021, Penn’s Interactive gaming segment contributed 7% of the total revenues which is likely to reach meaningful levels by 2023.
• Before the pandemic, Sands’ Macau, Vegas, and Singapore properties accounted for 63%, 15%, and 22% of total revenues, respectively. The company’s Macau business was observing strong growth propelled by new property openings, mass-market gaming wagers, and rising tourist inflow. As temporary property closures led to operating losses, the company completely shifted its focus on the high-growth regions in Asia and completed the sale of its Vegas resort in the first quarter.
• The conventional casino industry observed a contraction from restriction measures and intermittent lockdowns during the pandemic, but online sports betting and iGaming businesses reported strong growth numbers. Notably, the online sports betting and iGaming market in the U.S. is expected to reach $22 billion and $40 billion at maturity, respectively.
• Currently, the proposed changes in Macau’s gaming law and the modalities of casino license extension are suspected to affect the operations and capital return policies of all concessionaires. Thus, Sands is likely to observe a headwind as its growth plans focus on Asia and particularly Macau. (related: Is Wynn Stock Now Ready To Roll?)

Returns (Profits)

Before the pandemic, Sands reported a much higher operating profit margin and net margin than Penn National Gaming. However, revenue headwinds are weighing on Sands’ profitability metrics in recent times.

• The company’s high net income margin was key to regular dividend payouts and stock repurchases before the pandemic. Thus, the company had a well-established capital return policy. In 2021, Sands reported $4.2 billion of net revenues and $243 million of operating cash burn.
• In 2021, Penn National reported $5.9 billion of total revenues and $896 million of operating cash flow at an operating cash flow margin of 15%. The company utilized $1.1 million of operating cash on property, plant & equipment and acquisitions by raising additional long-term debt.

Risk

Per annual filings, Sands reported $14.7 billion of long-term debt, $2.3 billion of total equity, and $20 billion in total assets. Whereas, Penn National reported $11.3 billion of long-term debt, $4 billion of total equity, and $16.8 billion in total assets. Las Vegas Sands has higher financial leverage than Penn National Gaming.

• While higher financial leverage leads to higher cash burn during a downturn, Sands’ stringent cost control measures have limited operating cash burn to just $1.4 billion in the last two years.
• In 2019, Sands reported $12 billion in revenues – nearly thrice of Penn National’s $5.3 billion. However, Penn National’s comparable long-term debt obligations could be a drag on long-term shareholder returns if growth metrics stall.
• Considering a scenario where business in Macau and Singapore return to normal by year-end, Sands’ high margins will generate more cash than Penn National Gaming. In our previous article, Should You Bet On Las Vegas Sands Stock After The Historic Announcement?, we highlight the strong margins of Sands’ Singapore and Macau properties.

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