A ‘Gamble’ on China’s Burgeoning Middle Class

The sell-off Tuesday presented investors with an opportunity to buy what Cramer called the one of the “greatest turnaround stories of the era” at a lower price: Las Vegas Sands.

Shares of the casino operator are now trading three points off its 52-week high, but just 18 months ago investors worried it wouldn’t be able to repay its debt and the stock traded below $1.50. Moody’s upgraded its debt Friday and on July 28, the company reported a “beautiful, blow-out” quarterly earnings of 17 cents a share for an 8-cent beat on revenues that increased by 50.7% from the year before.

The turnaround at Las Vegas Sands was made possible, in part, with their “huge bet” on Macau, which is one of just two Chinese cities where gambling is legal. Cramer called it the “Vegas of the People’s Republic,” where China’s booming middle class goes to spend their money. LVS now has three properties there: The Sands Macau, Venetian Macau and the Four Seasons Macau. In the most recent quarter, net revenue rose for these properties by 29 percent, 31 percent and 196 percent, respectively.

In July, Las Vegas Sands opened the Marina Bay Sands report in Singapore. The country awarded the casino operator one of only two licenses to develop integrated resorts. In the first 65 days of operation, the Singapore property contributed $94.5 million in adjusted earnings before interest, taxes, depreciation and amortization.

Seventy-five percent of Las Vegas Sands’ business comes from outside of the US, but the casino operator has two properties in Vegas—the Venetian and the Palazzo—and another in Pennsylvania; the Sands Bethlehem. Cramer said the Vegas properties are “performing well relative to the competition.”

Cramer said the turnaround also has to do with its balance sheet. It was so debt-laden that the company seemed it could fold in 2008. But the company raised $3 billion from its initial public offering of Sands China in November 2009, and, on Aug. 18, LVS announced it would pay down $1 billion in debt and amend its $3.9 billion credit facility, so loans aren’t due until 2015 and 2016. That way, the company won’t spend as much on interest payments and the savings go to the bottom line.

Las Vegas Sands is currently selling for 27 times next year’s earnings versus Cramer fave Wynn Resorts, which is trading at 39 times next year’s earnings. Compared to Wynn, LVS has more exposure to Macau and Singapore and more room to clean up its balance sheet. Cramer thinks LVS could go higher over time, as people come to realize the potential in China’s burgeoning middle class.

“What happens in Vegas stays in Vegas, but what happens in Macau and Singapore goes right to Las Vegas Sands’ bottom line,” Cramer said. “Today’s 5 percent pullback in the stock could end up being a gift.”

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