PDYPY - Boyd Gaming: One Of The Best Havens In The Sector Recession Or Not

2023-08-23 07:50:03 ET

Summary

• Boyd Gaming Corporation has shown resilience and strong management qualities, making it a promising stock in the casino industry.
• The US regional casino business is experiencing growth due to a return of gamblers and tourists, as well as the popularity of non-gaming amenities.
• Boyd Gaming's strong financial performance and strategic investments, such as its partnership with FanDuel, make it an attractive investment option.

Above: The metro Las Vegas area continues to grow faster than the nation.

We have been covering Boyd Gaming Corporation (BYD) for ten years as an analyst, but have known the company for twenty as an industry participant. Our bull scenario on the stock springs from qualities we have seen in management over time that stands up to almost any headwind, and gains tailwind momentum fast.

Our general outlook for the industry today plays well into the BYD bull scenario.

Overall, the two markets in which BYD has a powerful footprint at the moment are still benefitting from pent-up demand resulting from the effective end of covid. But that factor is beginning to wane. In its place, we have seen a return by gamblers and tourists to a cycle of normalcy in terms of available wallets and frequency of visitations.

Last year, the AGA estimated that US visitation to casinos had reached 86m total visits. Commercial casinos (not including tribal properties) racked up $60b in win during 2022 and are currently poised to break that number. There are many drivers of this gain without pent-up demand spearheading recovery as it did in 2021/22. Among the largest contributors is the traditional demographic player base. Older demos have returned to slot machine play. This includes early retirees, a segment that has been accelerated by the covid crisis. Adults from 55 plus and up have opted in great numbers to take early retirement during covid. That is part of the reason why the macroeconomy continues to face labor shortages. This segment comprises a significant portion of casino slot play post covid. It has always been the case pre-covid as well.

Then there is the exponential growth of the YOLO attitudes that are clearly linked to casino visitation increases. Y OU O NLY L IVE O NCE is a mantra that has sprung out of the nightmarish statistics of early covid infections when hospital wards overflowed with seriously ill flu sufferers. Added to it was the grisly truth that so many families had members, relatives and friends who had been stricken by the illnesses related to covid. It prompted a re-examination of people's lives as they saw evidence daily of its fragilities. It impacted consumer attitudes up and down the demographic trend lines. For years, casino operators had been chasing millennials, fearful that long-standing popularity among older generations was aging out.

This produced a massive tech initiative to add themes and features to slot machines, presumably to appeal to younger demos-millennials specifically. This on the whole did not work per se. What did work was covid and the sparking of YOLO thinking among the young. The l egalization of sports betting in 2018 which brought a surge of millennials to casino sports books. These new cadres migrated in great numbers from live sports books to the blackjack games and slots on the casino floor. So now what we see in the US regional casino business is a greater age diversity of players than we have ever dealt with.

Millennials have not only embraced live sports books, but far more crucial, the diverse non-gaming amenities of casinos like night clubs, dining, shopping and entertainment from A-List performers of their generation in arenas and showrooms.

Add to all this a return of regional convention and meeting business and you have the structural logic of where these increases in gaming win post covid are coming from.

In brief, the casino business in the US regional space is in a healthy state. However, economic uncertainties loom post covid in the macroeconomy. Despite some opinion that inflation is beginning to come down, the overall picture remains dim. We have calls for a soft landing, at worst to the gloom and doomers who see nothing less than a full-blown financial crisis as bad as the 2007-9 era. Labor shortages are beginning to ease. Employers are starting to move out of the desperate state of throwing money at applicants. Latest data from sources at the Wall street Journal have started to see a decline in salary offers forthcoming from companies no longer in extremis due to labor shortages.

Other economists are warning that as the imminent restoration of student loan obligations nears, the 45m Americans who must now again cough up their monthly repayments/interest costs could damage the spending power they had during the student loan moratorium.

Investors in the gaming space who saw past the covid crisis have seen portfolio gains across the board for the top operating companies. In addition to dramatic revenue recovery, we have seen that companies which had slashed costs during covid to minimize cash burn, are keeping those cuts in place. They are more efficient, improving margins and reducing debt with repayment programs aimed at reduced leverage.

Investors are best guided here to see value in those gaming stocks which have proven resilient in the past, which have participated in the recovery and continue to produce impressive earnings. Beyond that, they are companies one can feel comfortable with should the economy get hit with either a soft landing or a major recession next year.

Our leading candidate in the US regional space: Boyd Gaming

Above: Debt is slowly coming down, but could be faster than some believe.

We have been fans of this company since their early days as a Vegas locals entry under the eponymous brand of SAM'S TOWN, founded in the 1970s by Sam Boyd one of the great legacy fathers of the industry.

The company owns and operates 28 properties in 10 states, 9 of which service the Las Vegas locals market. The 19 regionals span ever section of the US: South, Midwest, East and of course, Las Vegas. BYD has no presence on the strip as its locals business has thrived on the growth of Clark County, thick with the aforementioned transplanted early retirees.

It is notably one of the best asset allocators in the business. In 2003 it partnered 50/50 with MGM Resorts International to build and operate what became Atlantic City's number one revenue generator till this day, The Borgata. BYD sold its 50% of the property in 2016 to MGM for $900m, pocketing a top line profit of $600m. It promptly deployed some of those gains with property acquisitions to its Vegas portfolio for around $250m.

As a largely unnoticed bumper to our Strong BUY rationale note that BYD quietly bought 5% of FanDuel, the #1 sports betting platform from parent Flutter Entertainment (PDYPY). The deal calls for a partnership covering all 28 BYD sports book casinos plus brand participation of FanDuel mobile.

Now that the arbitration panel has ruled on the dispute between BYD and FoxSports (FOXA) on the valuation of its 18% option on any FanDuel IPO ahead, the value of this very savvy move by BYD early in the sports betting explosion at ~$3.4b that means that the BYD's equity stake is worth ~$800m.

BYD also operates the Stardust online sports betting ICasino platform as part of its ongoing presence in digital gaming.

BYD by the numbers: A quick take

On October 17,2022 we wrote a strong buy recommendation on BYD on SA. The price at that writing was $52.27. Our PT in that article was $71. Since then, BYD has reached that level but has now fallen back to $64/94 at this writing. Despite that, our current PT on the stock sits at $80-which is exactly where analyst consensus now estimates its forward appreciation.

TTM for context

Revenue: $3.661b (Pre-covid 2019: $2.622b so BYD has advanced beyond its 2019 baseline).

Gross profit: $2.597b (Pre-covid 2019: $1.351b)

Operating income: $1,0512b (Pre-covid 2019: $472m)

EBITDAR: $1,434.7b(Pre-covid 2019: $846.9m)

Earnings from current operations: $721m (Pre-covid 2019$157m)

Diluted EPS: $6.89 (Pre-covid 2019: $1.38

Forward EV/EBITDA 7.84

EV: $9.99b

Market cap: $6.48b

Total debt: $3.77b

Cash on hand: $261m

Current ratio: .08-around average for most gaming peers in Vegas, which run around 0.8--0.9. BYD's debt profile suggests in could be somewhat more aggressive in paying down debt given its FCF going forward.

Debt to Equity ratio: 2.10

BYD has repurchased $100m worth of its shares, with an authorized $533m left unused and approved.

Conclusion

While BYD's debt profile could be somewhat more comforting to some investors, overall it should not be a barrier to entry for a stock that otherwise has performed admirably in all its regional casinos and Las Vegas locals market. The company has kept covid era savings in place, improving margins. As a former c-suite executive in the industry, I believe its performance is a reflection of a very astute management team prepared to take on whatever the macroeconomy has to throw at the industry in the quarters ahead.

Overall given its performance over the past decade through various industry ups and downs, we believe BYD has invested wisely in markets it knows well. Our PT aligns (as it rarely does) with that of analyst consensus at $80 a share by the end of this year or before. And assuming a so-called soft landing for the economy next year, we see its growth continuing as a result of the way events have reshaped the attitudes of their players.

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