Tuesday, April 28, 2020 / by Ken Couture
Las Vegas Sands (NYSE: LVS) reported first-quarter earnings on April 22, and it laid out both a scenario for recovery and how the company is preparing for the worst. The headline numbers of a 51.1% drop in revenue to $1.78 billion, net income plunging from $582 million a year ago to negative $1 million, and the suspension of the dividend are important to note, but they don't actually tell us much about operations a few months from now.
Instead, investors should be closely following what management is saying and how they're preparing for both best-case and worst-case scenarios. Here's what I took from the earnings report.
Asian markets are getting better, probably
Management seems to think that travel and gambling demand will come back "rather quickly" once restrictions are lifted in Asia, which could mean a steady recovery starting in the summer and continuing to the end of the year. It's important to note that regional differences in travel restrictions will mean that this isn't going to be a V-shaped recovery in any way but rather small upticks that eventually add up to a big rebound.
COO Robert Goldstein said Guangdong province near Macao will be the first to return to Macao with other provinces following over time. But in Singapore, we know that Marina Bay Sands is closed until June 1, so the recovery may be slower there.
Cost-cutting has come quickly
In 2019, Las Vegas Sands reported $10.0 billion in operating expenses, which includes everything from labor to food and depreciation on real estate. As operations have shut down, the challenge has been cutting those costs as much as possible to reduce cash burn, and the amount management says they've been able to cut is pretty astounding.
In a zero-revenue scenario, management expects Macao operations to require $110 million in operating costs per month. Marina Bay Sands in Singapore will burn $45 million, and Las Vegas will burn $65 million in cash. In total, that's $220 million per month of estimated run-rate expenses with no revenue coming through the door. Add in interest expenses, corporate costs, and minimal maintenance and growth capital expenditures, and the company expects to burn $355 million per month in these conditions.
That's an annual run rate of $4.3 billion, which seems like a lot, but Las Vegas Sands could withstand that downturn for a while, given its rock-solid balance sheet.
Liquidity for days
Currently, Las Vegas Sands has $2.6 billion in cash and equivalents on the balance sheet and $3.9 billion of short-term borrowing capacity. In total, the company has $6.6 billion of liquidity available, enough to last for about 18 months without revenue, while still maintaining current development plans in Macao and Singapore.
That kind of cushion means there's not likely to be a cash crunch at Las Vegas Sands like there might be for other casino stocks. If any company can make it through this crisis, Las Vegas Sands is it.
What we learned last week
Revenue and earnings are certainly going to be down across the casino industry over the next few quarters, but Las Vegas Sands' management seems to think demand will soon start to pick back up. Not all regions will come back right away, but even a fraction of the revenue the company once had would be welcome. And we've seen that this is one company that can absorb a 50% decline in revenue and still break even.
Cost cutting measures are coming in fast and furious, and liquidity will be key for survival. As earnings reports come out across the industry, investors should look for how long a company can survive in a low-revenue environment as this is the worst-case scenario that investors should come to terms with before even thinking about what the eventual recovery looks like.
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