With analysts forecasting Las Vegas Sands Corp (NYSE:LVS) to record a contraction in earnings of -17.61% in the coming 12 months, it’s important to take a step back and evaluate this unfavourable outlook. Those invested in the stock should contemplate the factors that are causing this decline, as the return realised by shareholders may look different in the future if underlying assumptions are not realised. To get some insight, I will shine a light on the behaviour of Las Vegas Sands’s margins so investors can evaluate the revenue and cost drivers behind future earnings projections and understand how they may impact on returns compared to the industry.View our latest analysis for Las Vegas Sands
A closer look at LVS’s profit margin
Attractive margins generally indicate a desirable ability to translate sales revenue in to earnings, and return for shareholders. LVS’s profit margin will help us understand the extent of this ability, as well as identify the forces behind earnings expectations.
Margin Calculation for LVS
Profit Margin = Net Income ÷ Revenue
∴ Profit Margin = 3.78 Billion ÷ 13.39 Billion = 28.23%
The past five years have seen Las Vegas Sands’s margin expand, with 8.33% in average net income growth exceeding average revenue growth of 3.10%, which means that the previous increase in revenue has coincided with a larger portion falling to the bottom line. LVS’s most recent margin of 28.23% appears to follow this trend, which suggests that the increase in net income has likely occurred from a combination of enhanced cost efficiency as well as top line growth.
Using Las Vegas Sands’s margin expectations as a way to understand projections for the future
Margins are expected to shift towards contraction, with annual revenue growth tipped at 3.60% and a -8.50% expected annual decline in net income. This suggests the previous earnings growth is expected to reverse due to an increase in costs rather than a dramatic fall in revenue potential. This is causing negative net income growth, whilst revenue growth remains positive, resulting in the expectation for margins to contract. Despite this, those watching the stock must know margin contraction can hold various implications on the company’s performance depending on how it operates, which makes further research very important. Profit margins are commonly useful when employed as a comparitive measure to judge a business’ profit-making ability against its industry. For LVS, profit margins moving forward are forecasted to contract as the margins in the Hospitality industry expand, and at the same time, LVS’s forecasted ROE of 40.73% exceeds that of the expected 13.89% ROE of the industry (note that this observation is also influenced by relative debt levels). This suggests that analysts expect Las Vegas Sands’s return per dollar of equity will exceed the industry due to the earnings attributes identified in our margin analysis. However, margins use items on the income statement that are prone to being manipulated by various accounting measures, which can distort our analysis. Thus, it is essential to run your own analysis on Las Vegas Sands’s future expectations whilst maintaining a watchful eye over cost behaviour, because if the business is able to maintain their revenue trajectory, there may be an opportunity to return to positive earnings growth and attractive returns.
For LVS, I’ve compiled three fundamental aspects you should look at:
- Financial Health: Does it have a healthy balance sheet? Take a look at our free balance sheet analysis with six simple checks on key factors like leverage and risk.
- Valuation: What is LVS worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether LVS is currently mispriced by the market.
- Other High-Growth Alternatives : Are there other high-growth stocks you could be holding instead of LVS? Explore our interactive list of stocks with large growth potential to get an idea of what else is out there you may be missing!