Capone’s Legacy, continued … Booze and Gambling. Mmmmm.

By Travis Johnson, Stock Gumshoe, August 12, 2008

Well, even the AP is playing along, trotting out the tried-and-true “people drink more during recessions” article yesterday … to go along with Karim Rahemtulla’s “Capone’s Legacy” stocks. We took a brief look at Anheuser Busch yesterday, which has a slight connection to Capone because the Chicago gangster bought a summer home that had been built for one of the Busches. Clarence Busch had the misfortune to build his waterfront mansion in 1920, the first year of prohibition, and Capone ended up buying it later that decade, not long before the 1929 Valentine’s Day Massacre pushed the feds to more forcefully investigate and eventually convict him …

It was downhill after that for Capone — prison time took away his control over the Outfit, and the end of prohibition took away one of their biggest profit streams, but it sure was good for the liquor and beer companies.

Rahemtulla teases us with several other “sin” stocks that follow in Capone’s legacy, what are they?

Number two is in the liquor business … Rahemtulla urges us to collect “54% Payouts from a Global ‘Spirits’ Powerhouse

“This booze business just started distributing spirits and wine in Asia on a grand scale.

“Its products are hitting the shelves in new markets from China to Japan to India. The strength in these markets has increased operating profits by 20%.

“Based in Europe, this company cranked out over 7.6 million 9-liter cases of rum, over 15 million 9-liter cases whiskey and over 2 million 9-liter cases of gin in 2007 alone. But it also distributes other spirits… like beer, vodka, tequila, liqueur and more. In fact, this global powerhouse pours 9 of the 20 top spirits in the world.”

Other clues?

It’s big — over $60 billion, earnings in the last six months of $2 billion.

Pays a nice dividend — “54% greater than S&P 500 stocks.”

So … leaving aside the fact that it’s terribly misleading to say that you’ll get a “54% payout” when what you mean is that the dividend is 54% higher than the average S&P 500 dividend, this is a well-known company that many investors like:

Diageo (DEO)

The $60 billion is the company’s enterprise value, not the market cap (enterprise value is net debt plus market cap, the amount it would really cost you to gain control of the company). The dividend is currently about 2.7%, so it is significantly higher than the S&P average even if it’s not terribly remarkable.

DEO is a company I’ve been tempted to buy several times — I nearly bought shares in the mid-$60s back in the Spring of 2006, but ultimately decided there was too much of a premium built into the price. It then went on a nice run to $90 or so last Winter, and fell back significantly until the bounce back to $75 or so as recession fears have folks interested in buying consumer staples.

And if you ask me, Johnnie Walker — one of Diageo’s leading brands — is indeed a consumer staple. At least in my house. I still like the company, but it’s still not cheap. Their growth prospects do indeed seem to be strongest in Asia, where premium liquors are a relatively inexpensive status symbol for the nouveau riche and whiskey has been a popular import for decades.

With a large stable of powerful brands, including Johnnie Walker, Guinness, Smirnoff, Tanqueray, Cuervo and dozens of others, and a very strong marketing machine that seems, to me at least, to be stronger than those of other hard liquor brands, I think things will probably be reasonably bright for Diageo … for some reason I’d just like to see it trade as a bargain instead of the reasonable value that I think it represents today. I’ve missed some great buying opportunities in this stock in years past, so perhaps I’m just bitter.

But we’ve got some more companies upon which to gaze … let’s move on.

Capone Legacy company number 3 …. “Playing Casinos for 1,266% Returns”

Much less in the way of clues, here’s what Karim says about them:

“This hotel and gaming operation currently controls over 35,000 slot machines, almost 2,000 gaming tables, and operates over 2 million square feet of casino space. Capone would love this one.

“It has a $17 billion dollar market cap and has returned a staggering 1,266% over the last decade. And it should do even better over the next few years…”

While the clues are somewhat limited, this must be Las Vegas Sands (LVS)

And man, has this one been on a tear — both over the last ten years, and over the last month. Of course, inbetween it had a rough patch, like for the year leading up to July 15 when the shares fell from $150 to about $30. Yikes. They’re now changing hands at about $58, after nearly doubling in the past month on renewed optimism about Macau.

I’ve written about this company more than two years ago, too — and this time the shares are right about where they were in March of 2006, so I didn’t miss much. Except that run up to $150 and back.

Kidding aside, I do like Las Vegas Sands, but it’s important to note how much more incredibly aggressive LVS is than most other casino operators. Las Vegas is in the doldrums this year, thanks in no small part to high gas and airline prices and the sinking Southern California economy, but by all indications Macau is steaming right along — so Sheldon Adelson, CEO of Las Vegas Sands, may end up being even more richly rewarded fro investing so heavily in that former Portuguese colony.

LVS is the first mover in Macau, at least in terms of modern resort gambling, and they have probably the most impressive resort there in the Cotai Strip (the Venetian Macau). LVS is pushing the development around its casinos, too, trying to develop and profit from condos and shopping malls in and around its properties, and they have a very strong focus on the convention business both in Las Vegas and in Macau, so they’ll hope that those ventures help to smooth the bumps from relying on individual tourists and gambling junkets.

If you’re a gambler, you’ll probably love Las Vegas Sands — this is a double down, we’re not talking about a safe bet on the recession resistant urge to gamble, but about an all-in bet on the future of asian gambling resorts. Las Vegas Sands will also be one of the first movers in the newly-created Singapore gambling business, so they continue to push the envelope and make big investments. I’d bet that they will pay off, and if I were to buy a gambling stock it would probably be LVS just because it seems pointless to bother with less exciting players. But it won’t be a cushy ride, LVS is probably the most richly valued casino stock, and the fastest grower — they’ll benefit if Las Vegas turns around, thanks to their high end Palazzo and Venetian resorts, but the company has made it’s big bet in Southeast Asia.

That’s not to say that others aren’t also betting on these same areas — and the competition will probably be fierce, not only from fellow American casino operators MGM and Wynn, but from the other concession holders in Macau as well — Stanley Ho’s SJM (the former monopoly casino licensee), which poached a LVS executive and held a recent IPO to raise money to build a huge new casino resort (Oceanus, I think it’s called), and Melco (MPEL), which started by opening little bistro casinos but is also planning its first ambitious big casino resort (the City of Dreams). That competition is part of the reason why I’ve shied away from LVS and the others, but I still prefer Sheldon Adelson’s Las Vegas Sands over his competitors — being the first mover, and having a proven track record for building value in these new resorts, means something.

Clearly it doesn’t mean LVS is worth $150 a share … but is it worth more than $60? With US gambling in trouble to some degree, and with almost every state eager to open up casinos that tend to dilute the big Las Vegas casino resort experience, I’d rather bet with someone that also has big irons in other fires, but it still might be quite a while before LVS grows into its valuation.

That’s got to be about all you can stand from the Gumshoe for one reading — I’ll close out with the other sin stocks shortly.

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5 Comments on "Capone’s Legacy, continued … Booze and Gambling. Mmmmm."


elissa stein
elissa stein
August 12, 2008 1:36 pm

Good report, Gumshoe! I too, am waiting for Deo to fall further. It is a good company. But for now, I think the most important thing is to invest in defense stocks. Russia’s sojourn into Georgia ( appears there is a ceasefire in the works) looks like the start of many more commodities based skirmishes to come…

August 12, 2008 1:46 pm

My current idol (besides you Gumshoe) says that Raytheon is a nifty buy. Leeb considers it a good ‘defensive’ play (har har). And yes you can have two idols, especially in India!

farley 5
farley 5
August 12, 2008 2:54 pm

Wow! LVS is a volitile one.,PLUADANRBO%5BPA%5D%5BD%5D%5BF1!3!2!!2!20]&pref=G

Suppose you may have a bounce to the Bearish Resistance line at $82. This poor thing has a lot of work to do. Traders may do well with very tight stops. As Spreadtrader says: Volitility is the traders friend. I can’t use this one as an investment. Too old to be nimble.

August 12, 2008 5:16 pm

Do you know which india homebuilder stock that Navailler is talking about in his lattest teaser for Quantum Growth?

August 12, 2008 5:45 pm
Do all “defensive plays” go down? RTN is a very interesting long term chart. On a weekly chart draw a trend line from the low in October 2005 through the low in January 2008 and continue the line upward to the right of the chart. You’ll see that the present price at 61.00 touches the line from below. This is called re-testing the trend line. Odds are that the stock will fall from here, especially based upon the pattern exhibited from October to May. I’d look for a downside of 45.00 – 51.00. P&F technicals confirm that it’s not a… Read more »