I've never been really much of a gambler, but as an investor, I am intrigued with a business where the house always wins in the end. I am even more intrigued when a company's competition is limited by government fiat. I have invested in the casino and gaming companies in the past, and some circumstances today are leading me to give them a fresh look. As Michael Corleone lamented in The Godfather III, "Just when I thought I was out, they pull me back in."
Despite its name, Las Vegas Sands (LVS, $43) derives about 85% of its revenue from its Asia resorts and casinos.The government of China apparently does not want the country overrun with blackjack players and slot machine junkies, so they have limited legalized gaming to the small region of Macau. LVS has one of six licenses to operate casinos in Macau. Two of the other licenses are held by Wynne Resorts (WYNN, $111) and Melco Crown Entertainment (MPEL, $10). LVS also holds one of only two licenses to operate casinos in Singapore.
Las Vegas Sands has a colorful history that goes back to the glory days of the legendary Sands Hotel on the Las Vegas Strip. The original Oceans 11 was filmed there in 1960, and the Rat Pack (Frank Sinatra, Dean Martin, Sammy Davis, Jr., Peter Lawford, and Joey Bishop) performed in the hotel's Copa Room. Howard Hughes owned the Sands at some point during the 1960s. The property's next owners decided that nostalgia needed to give way to more glitz and glamor, so in 1996 they imploded the Sands to make room for The Venetian. When the company set its sights on Macau, it realized that land was too limited to develop something on the scale of the Las Vegas Strip, so they created more land by filling in the bay between Coloane and Taipa Islands. That is now the Cotai Strip, home to one of the world's largest inhabited buildings, The Venetian Macao. LVS now has several casinos in Macau, and its newest resort/casino is the Marina Bay Sands in Singapore.
Back here in the U.S.A., the Department of Justice announced in December that it has changed its position on how the Wire Act of 1961 applies to online gaming. Previously, the DOJ held that the act prohibited all forms of online gambling, but now is taking the position that the act prohibits only sports-related gambling. The removal of the federal prohibition means that states may be free to legalize forms of online gambling that do not involve wagering on sporting events. The immediate effect likely will be to allow states that already have lotteries to sell lottery tickets online. It's now all up to the individual states, but states are hard-pressed for new sources of revenue, and it is conceivable that the lifting of the federal ban will lead to other forms of online gaming in states where lotteries are already legal.
As investors, we always need to respond to any trend, change, or development by asking, Who stands to benefit? When we looked at the trend in online shopping, for example, we noted that UPS and FedEx are beneficiaries of that trend because someone has to deliver all those packages. When the casino business was booming in the 1990s, I invested in a company called International Game Technology (IGT, $17), a maker of slot machines and other gaming equipment. One of the ways that casinos compete with each other for customers is to always offer the latest, state-of-the-art machines and gaming systems, and this competition among the casino operators just meant more business for IGT. I did well with IGT then and really haven't followed the company since. They made a few missteps several years ago and lost ground to their competitors, but now they may have their act together. IGT has developed something called "IGT Cloud," which is aimed at helping individual casinos better manage and offer more varied gaming content. If the company can leverage its cloud presence into some form of online gaming, that could be an opportunity for them. I'll be keeping an eye on IGT.
As for LVS, the company has been under investigation by U.S. authorities (the Securities and Exchange Commission and Department of Justice) and the Hong Kong securities regulators based on bribery allegations made by a former company executive. The Hong Kong authorities have concluded their investigation and will be taking no action against the company, but the U.S. investigation is still ongoing. That has put a cloud (a dark one, not an Internet one) over the stock that may remain until these issues are resolved.
I saw the stock's weakness as an opportunity to invest in a strong growth story at an attractive price, but some investors may want to steer clear. Doing business in a country like China adds another layer of risk to what is already a risky business. Michael Corleone might have been spared his tragic, King Lear-like fall if he had just stayed put in New York and avoided Las Vegas entirely. When it comes to investing, what happens in Vegas definitely does not stay in Vegas.
Just when I thought I was out............
Life is short. Get busy.
Jim
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