As we ready for the onslaught of fourth-quarter earnings reports, here are some thoughts on two companies that can be considered somewhat speculative—one big, one small.
- Las Vegas Sands (LVS). As is its custom, LVS kicked off earnings season; and as usual, LVS reported strong results while CEO Rob Goldstein pounded the table on the company’s future.
As has further become custom, the market response was lukewarm. The stock closed up a tepid 51 cents a share on the day after the earnings release to $50.15. Strong results and CEO bullishness aside, that still left LVS 23.5 percent below its 52-week high of $65.68.
On the surface, the case for LVS is simple and compelling. It can be a $6 billion EBITDA generator based on its growth projects in Singapore and Macau.
And those markets may have years of further growth.
Macau, now almost completely recovered from Covid, can grow from an expected $25 billion revenue market this year to, Goldstein believes, more than $40 billion. And LVS has the lion’s share of rooms and amenities to capitalize on that growth. That is all the more to the company’s benefit as Macau transitions to the Las Vegas tourism-convention business model of a gambling capital.
Singapore has a stable and historically business-friendly government to assure investors of its long-term prosperity.
Then there is the prospect of a return to U.S. operations. LVS is one of the bidders for a New York City casino license. You can bet that if it wins, the company will build a huge and iconic property that will do for New York what Marina Bay Sands does for Singapore.
Further, the move by the controlling Adelson family to gain political influence in Texas by purchasing the Dallas Mavericks basketball team hints at the potential for LVS to land a mega resort in the Big D if casinos are legalized in the Lone Star State.
The company also has revived its quarterly dividend and is buying back shares assertively.
So, with all of those positives, what gives with the stock price?
The answer is China. Investors are concerned that a punk Chinese economy could limit growth of Macau’s casinos.
That is the kind of short-term concern that presents long-term opportunity.
However, China does present a legitimate concern: The Communist Party still controls the national government, and there is political risk in how it will treat a growing gambling industry, especially companies controlled by rival America, and as gambling is anathema to the Communist ideology.
Today, Macau’s gaming industry does not appear to be at risk, but it would not be surprising to see it capped in some way.
Investing in Macau casino operators reminds me of the advice an American investor gave on investing in Russia after Communism fell in 1989: A young investor with $100,000 to invest should put it into Russia. An older investor with millions to invest should put $100,000 in Russia.
- Inspired Entertainment’s stock jumped recently, not on earnings, but on an announcement that it will be reporting third-quarter earnings before February 28.
Inspired has been untouchable for many investors since it announced errors in the way it recorded some earnings and that published financial results for the past couple of years should not be relied upon.
Now, revenue recognition issues are not unheard of in our technological world. But it’s hard to invest in a company not knowing whether the issues are egregious or arcane, and the CFO has since left, after all.
As of this writing, Inspired’s stock is $9.23. That’s 46 percent above its lows reached after announcing its accounting issue, but 44 percent below its 52-week high of $16.44.
We’ll soon know how significant Inspired’s issues are. Truist analyst Barry Jonas thinks the hit to EBITDA might be 7 percent or less. He maintains a buy rating on Inspired, though he dropped his target price to $13 from $19 because of the uncertainty. Jonas also points out that even a 7 percent hit gives a stock selling at under five times EBITDA and yielding 17 percent in free cash flow.
If the problems are in the range Jonas mentioned—which seems reasonable if only given the long track records of Executive Chairman Lorne Weil and CEO Brooks Pierce—Inspired might be an opportunity waiting to be seized upon.
The company virtually owns the potentially lucrative virtual sports betting space; it has a rapidly growing business selling game content to online operators; and is entering the U.S. route and VLT businesses, and online lottery. Cases can be spun for $20 and $30 a share valuations, and Aristocrat purchased online lottery company NeoGames for what would translate to around $40 a share for Inspired, which in itself could be a take-over candidate at its depressed price.
Again, we’ll know soon enough.
Meanwhile, giant Las Vegas Sands and diminutive Inspired Entertainment look worth exploring by those willing to take a chance.
