BYD - Boyd Gaming: A Solid Buy On The Dip Play Now At Under $60

2023-11-20 11:59:04 ET

Summary

• We have strong long-term conviction on BYD due to its savvy asset allocation skills and operational efficiencies.
• BYD now trades 15% below its July high. Sellers thought it looked toppy.
• Hidden value: BYD owns 5% of Flutter (Fan Duel) equity in a partnership deal that will appreciate considerably when FLTR trades on the NYSE.

Premise

Last July, the shares of Boyd Gaming Corp. (BYD) traded ~$72 off the continuing positive news of surging post-COVID recovery in the gaming sector. The central driver for the trading in particular was the record-breaking sequential gaming win rolling up in Las Vegas. BYD is not a strip casino company, but its huge presence both in downtown Las Vegas and the locals market participated in that growth. The powerful recovery had also reached US regional properties, including the 29 operated by BYD in 10 states. Analyst consensus with which I agreed, was ~$80 - with some higher at $83.

On August 23 I posted on SA an article on BYD with a PT of $80 by year's end, pretty much in line with bulge analysts' bullish outlook at the time. My conviction was based on what I knew of BYD's history, its remarkable success in asset allocation, its tight focus on customer service, and the ongoing assumption that post-covid recovery revenue surges would continue ramping. But BYD had fallen in a month to $64, ~15% down, and further away from consensus PTs.

BYD's core business of stable rated slot play is among the most recession-resistant segments as its older demos are heavy with well-positioned early retirees. Archived data drawn from our 35 years in casino management shows that fixed-income slot player segments over 55 continue to play and visit at or near pre-recession levels. We don't suggest recession immunity but resilience is proven through the period I researched 2000 to 2022,

What's happened since the July high?

I sifted through BYD trading patterns, discussing them with industry colleagues and friends among hedge funds that held positions in the stock. I concluded that the decline was more a product of some profit-taking as well as concerns that the stock had a nice run but was looking a bit toppy in the low seventies. (It had begun the year at ~$56).

BYD's institutional holders comprise 71% of its outstanding. There are a total of 392 institutional holders of BYD. Since the decline 152 have increased positions between 1% and 3%, 52 have held, and 187 have sold. Three of the top ten sold significant positions, and the other seven either increased or held at their current level. Now it is understood that hedge funds tweak positions regularly for reasons sprung out of presumably predictive algorithms or analyst instincts watching trading trends. And of course profit taking.

Insiders during the past 12 months have sold off $64.5m of BYD stock against a market cap today of $5.7b. Most of the sell-down occurred between Q4 and Q2 this year. In Q3 there was a sharp decline in insider trading. Altogether it appears that at ~the $70s some sentiment increased that the stock was indeed getting a bit toppy. Analysts had held their PTs above $70 and still do. The mild sell down in my view was not related to performance at all.

Clearly, BYD was a solid, well-managed, financially stable casino operator with a strategic positioning that should have resonated with investors seeking stability and long-term growth with a strong margin of safety.

Now there are signs that BYD must be seen through a new prism which in my view, makes the case for a very attractive entry point now at below $60. I think the stock is oversold.

Above: BYD trending higher on all fronts according to this projection.

What's changed?

BYD posted a solid 3Q23 performance across the board during a period where the post-COVID subsidy stage has all but burned out.

BYD 3Q23a revenue $903m up from $877m y/y.

Net income $135.2m or $1.34 a share from $1.57 a share y/y largely due to some higher costs and softness in mass unrated play that was more than compensated for by gains in rated play both in Las Vegas and the regions.

In November of 2022, BYD acquired B2B Pala Interactive, a full-service tech stack and systems provider for sports betting platforms for $170m. It significantly beefs up its strong move to be more than and also ran in digital gaming. (BYD has changed Pala's corporate name to Boyd Interactive).

TTM

P/E: 8.78 For context, the P/E for Las Vegas locals competitor Red Rock Resorts (RRR) is 12.81.

The stock trades at 9X 12 month forward earnings after the 9% decline we noted above.

EPS: $6.78

Div: $0.16

Short interest as a percentage of float: 5.69% another indicator that on balance, forward sentiment on BYD is at worst neutral.

Market cap: $5.82b

RRR market cap $4.69

Business overview YTD

The key takeaways on BYD are these:

• Revenue will continue stable with rated play holding strong and retail or unrated play continuing somewhat soft but not materially impacting flow through. Some revenue softness related to disruption from room renovations at local properties was a factor in available rooms total. Overall BYD's 29 properties will continue to operate profitably in stable markets.
• Capex projects completed at downtown LV properties already showing improved revenue flows. Visitation to Vegas is up 8% and is expected to match 2023. The anticipated BYD capex plan for 2024 is expected to hold around $105m aimed at upgrading existing properties.
• Cost pressures in utilities, labor and insurance will ease somewhat, rated play positive trends.
• Direct Competition: RRR will open the Durango upscale locals property near the Orleans. A typical cycle in casino markets is expected to ensue: Short-term "must see" trial visitation could poach low single-digit revenues. Six months to twelve months new property is usually absorbed and existing properties tend to recover lost revenues. Long-term: evens out.
• Nevada is among the fastest growing metro areas in the US with a post-COVID surge continuing through 2030.
• The non-gaming employee strike was short-lived as expected, removing a perceived headwind from early this month.

BYD's moves in forming BYD Interactive makes it an undeniable player in the forward prospects for sports betting and iGaming. Its Q3 online revenue hit $90m up 72% y/y. Now controlling its own tech stack and building out its client list for other platforms it signals a far more active pursuit of online goals than many competitors. It is a small player in the online space now, but with its buy of Pala, and its deal with Fan Duel it is poised for a big move.

When Flutter shares (Fan Duel) debut on the NYSE in 1Q24 BYD will enjoy an increase in the valuation of its 5% equity piece that is not yet built into the stock.

Dealmaking skills: Flutter equity kick

A bullish outlook is further reinforced IMHO now by the news that the long-awaited entry of UK/Ireland based Flutter Entertainment Ltd. (FLTR"L) parent of #1 market share leading Fan Duel is heading for an NYSE listing. BYD holds 5% of Flutter equity which is based on TTM value of $22b. It was a strategic partnership deal to bring the Fan Duel platform to BYD's casinos and interactive customer base.

An NYSE listing will dramatically enhance Fan duel visibility among investors. It will present a pure-play alternative to Draft Kings ( DKNG ). Our takeaway here is this: No, unto itself, the NYSE listing is no secret sauce to a monumental spike in valuation for the new listing or BYD per se. But without question, its market cap will grow, and one way or another bring BYD's equity piece a much higher valuation - not now built into the stock.

That put the BYD piece acquired at the cusp of the sports betting legalization in 2018, now worth $1.25b. The company's transactional instincts have no peer. It is to be recalled that in 2003 it partnered with MGM Resorts International (MGM) to build the $1b Borgata casino hotel in Atlantic City. In 2016 BYD sold its half of the property to MGM for $900m, netting $600m in the process. Under its management, the property had risen to lead the town in market share. BYD's timing was impeccable. In 2016, AC won $2.6b and $2.7b in 2022, showing no growth over the next six years.

BYD has proven itself adept at knowing when to hold em' and when to fold 'em. Not every competitor in the space has matched its unblemished record of producing money-making transactions over time.

BYD didn't sit on the money but promptly added to the robustness of its Las Vegas locals market by buying the Cannery Row and Aliante casino properties.

Conclusion

A well-balanced gaming stock portfolio should have stocks with exposure to all the key gaming growth nodes: The Las Vegas strip, Las Vegas locals, US regionals, sports betting, and Asia. BYD's footprint is diverse: Downtown Vegas for the tourist segment, Vegas locals market in a booming local economy driven by population growth, and in the US South and Midwest.

The company has proven its mettle in doing transactions and operating its properties efficiently. BYD manages its 29-property system with a 42.3% ROE.

We see the current dip off the summer high as a buy opportunity with a revised PT of $75 by the end of 1Q24 save a black swan event like a major recession. If we get what economists lately see as a soft landing, BYD has the product, the finance, and management chops to handle it well.

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