The Guest Blog

Farrell: Role the Dice

Jake Fuller labors mightily here at Soleil covering the gaming stocks. The poor guy even has to go to Las Vegas every now and then to make sure nothing escapes his sharp-eyed analysis. One of his recommended stocks is Las Vegas Sands Corp (LVS; buy rated; recent price $18.) Oddly, given its name, the play is much more a Macau/Asia casino story than it is a Vegas story. Of Jake's estimated revenues for 2010 of a little over $6 billion, about $1 billion will come from Las Vegas and the rest from Macau and Singapore. December growth and market share gains for LVS in Macau was better than expected. Jake is ahead of the Street with his estimates but he feels the potential for near term growth in Macau is not recognized.

LVS is opening the Marina Bay Sands in Singapore in 2Q 2010 and a Shangri La- Sheraton branded resort on the Cotai Strip in the back half of 2011, which is not yet in most projections. The Cotai project comes on a "strip" of land ala the Vegas strip that connects the Macau islands of Taipa and Coloane. His EBITDA estimate for 2010 is $1,483mm which is ahead of the Street consensus of $1,444mm, but the real divergence from consensus comes in 2011 and 2012. Jake is figuring 2011 EBITDA will total $2.1 billion and 2012 should reach $2.6 billion. The consensus for 2012 is around $2.3 billion. Using his 2012 EBITDA estimate and a multiple of 13 times, discounted back at 15%, yields a 12 month price target of $20. He expects consensus estimates will rise and that will put upward pressure on the stock. Risks include the ability to deliver projects on time and on budget, the wherewithal to maintain EBITDA estimates for Las Vegas in the face of increased competition from the opening of MGM's new CityCenter project, and maintenance of same-store share in Macau.

Speaking of MGM (MGM; hold rated; recent price $11.80), Jake continues his Hold rating on the stock. There is some evidence that the new CityCenter, Las Vegas (which has 6,000 rooms and is 50% owned by MGM) has not hit Las Vegas as badly as feared, which is good. But the 50% owned CityCenter could pose a competitive threat to MGM's 100% owned hotels. Industry executives are talking up the 2010 convention season as looking somewhat better than feared and MGM does have some exposure to Macau. It is essentially, however, a Las Vegas play.

Jake's concerns are that CityCenter could be problematic for several quarters as Vegas capacity is up. MGM is a one town story and the company has a $5.9 billion 10/2011 debt maturity to contend with. Resolving that slug of debt could be dilutive to existing shareholders. He has a hold rating and an $11 target. Jake's target price is based on a 2012 EBITDA target of $1.9 billion, a ten multiple, discounted back at 15%. Las Vegas Sands deserves a higher multiple of EBITDA since it has a concentration in the faster growing Macau area.

The last employment report showed a large decline in the number of jobs in the household survey (589,000 jobs were lost) which is used in the calculation for the rate of unemployment. There was at the same time a larger drop in the number of people that had stopped looking for work (a total of 661,000), so the rate of unemployment was unchanged. The household survey looks at "small" businesses and is very volatile. Further news came Wednesday as to the state of small business. The National Federation of Independent Businesses (NFIB) released its most recent monthly survey and it showed that small business optimism sank to a five month low of 88 versus 88.3 in November. Small business sentiment has been essentially flat for about six months.

One third of small businesses cite poor sales as their biggest problem, and another third name taxes or "government requirements" as their biggest nemesis. More businesses than not plan on cutting employment; few see the ability to raise prices so expect no inflationary pressure from this sector; and more firms feel that inventories are still too high. Credit for small business is still "hard to get" and, therefore, most do not plan on boosting capital expenditures.

Another report Wednesday showed mortgage applications rose a surprising 14% from last week despite the fact that mortgage rates were essentially unchanged. This is probably due more to people seeking to lock up a rate while they can more than anything else. My best guess is most feel mortgage rates are going higher and they better get today's rate before they move up. Rates will go up (I think) as the US economy shows signs of strength and when the Fed exits the mortgage backed market in March.

Vincent Farrell, Jr. is chief investment officer at Soleil Securities Group and a regular contributor to CNBC.