PSB Monthly Issue March 2013

| March 7, 2013

March 2013


In late February, New Jersey Governor Chris Christie signed a bill to legalize Internet gambling within the borders of the state.

Make no mistake, this is a huge deal.

While the bill will directly impact the state’s nine million residents, it also opens the doorway for several other states to follow suit.  That’s what really makes this an important step for the online gambling market.

As you may expect, online gambling has incredible potential.

Just to give you an idea, the global gambling market is projected to be worth more than $400 billion.  Roughly 25% of those profits come from the US.  But, only about 3% of that comes from Internet gambling, or around $3.5 billion.

However, if the largest states in the US introduce online gambling legislation, experts predict Internet gambling could claim over 25% of the profits in five years.  That’s over $25 billion!

What’s more, it’s the regional and local casinos in each of the states that are in the best position to profit from online gambling.  They’ll get the first crack at the market in their respective states.

With all that being said, it’s time to invest in a leading provider of regional and local casinos.

That company is Boyd Gaming (NYSE: BYD).

Key Investment Data

Name:  Boyd Gaming
Ticker Symbol:  BYD
Market Cap:  $606 million
Recent Price:  $7.00

PSB Rating System 4.7 Stars

Raging Revenue:  (4.6 stars) Revenues increased 3% year over year this past quarter.  With the upcoming opportunity in online gaming, revenue could really jump this year.

Beautiful Books:  (4.5 stars) BYD has $344 million in cash with more on the way after the Echelon sale.  The company has plenty of cash and cash flow to cover its debt obligations.

Stellar Structure:  (5.0 stars) Institutional ownership is strong at 60%.  Insiders own another 36%. Clearly, the smart money is on BYD.

Valuation Verification:  (4.7 stars) BYD is trading at just 0.50x book value and 0.24x sales.  That’s very cheap for an established gaming company.

Meaningful Milestones:  (4.5 stars) Boyd Gaming management took a major strategic step recently by selling its Echelon property on the Las Vegas Strip.  The company will now focus almost entirely on local casinos and online gaming.


Boyd Gaming is a casino entertainment company currently operating in eight states in the US.  It owns and operates 22 gaming properties located in Nevada, New Jersey, Illinois, Indiana, Iowa, Kansas, Louisiana, and Mississippi.  Plus, the company holds 50% controlling interest in the Borgata Hotel Casino in Atlantic City.

BYD focuses on the regional and local markets.  In Las Vegas, the company’s largest concentration of casinos is in Downtown Las Vegas, with three properties. And, the company has six additional casinos in the Vegas area catering to local residents.

Most of the remaining Boyd properties are in the Midwest and South.  Although, the Borgata in Atlantic City is the market leading casino in the city (and state).

To put it another way, BYD’s casinos are fairly diverse geographically with the primary market for the company centered in Vegas.

Here’s the thing…

There are several clear reasons why Boyd Gaming is set for an upside breakout…

First off, as I mentioned above, New Jersey just made online gambling legal.  There’s obviously a huge potential market that goes along with this deal.  And, all a company needs to compete in the space is a gaming license in the state.

Of course, Boyd already has that license and should have a first mover advantage.

What’s more, BYD has properties in other states that are strong candidates for making online gambling legal.  Illinois is one of those states and has a huge population. Clearly, the potential here is off the charts.

And that’s not all…

While the online gambling market develops, Boyd is wisely focusing on their strengths. That is, management’s efforts are centered on developing local and regional casinos.

To that end, BYD just recently announced they would be selling their unfinished Echelon resort to Genting (GENT), Southeast Asia’s largest gaming operator.  Now, this is a big deal because the Echelon property is on the Las Vegas Strip, at the site of the old Stardust.

The Strip is obviously a high profile place to have a casino.  But, it’s also a very expensive place to be.  BYD management recognized the costs versus the potential reward involved and made the decision to stick to what’s best for the future of the company.

The deal also will provide the company with $157 million.  That’s cash that can be used to expand or pay down debt.  Moreover, BYD also just sold off their Jai-alai operation in Florida for $65 million.

What’s more, Boyd hasn’t been shy about expanding in the regional casino market.  In 2012, the company bought Peninsula Gaming. Peninsula owns five properties in Kansas, Louisiana, and Iowa.

Clearly, the company is taking an aggressive approach towards executing their local and regional gaming strategy.  And, the online gaming market fits perfectly into their plans.

Now let’s take a closer look at the numbers…


As a gaming company undergoing a strategic shift in focus, BYD’s priority is on strengthening its balance sheet.  Revenue and profits will come with market opportunities.  But, it’s of prime importance for a debt-laden company such as BYD to be as healthy as possible.

That being said, fourth quarter revenues came in at $625.8 million, a 3.2% year over year increase.  The gain was due primarily to the acquisition of Peninsula gaming.

The company’s profits were significantly impacted by a nearly $1 billion impairment charge based on the sale of Echelon.  A better measure of the company’s bottom line at the moment is Adjusted EBITDA, which was $100.9 million for the quarter.  That’s down from last year’s $114.3.  However, the decline was due mostly to charges related to the Peninsula gaming purchase.

As of this writing, BYD hadn’t released its balance sheet for the most recent quarter. However, in the previous quarter, total cash was $344 million with debt just over $4 billion.

Keep in mind, it’s not unusual for a gaming company to carry a lot of debt.  Plus, the company could pick up $100 million or more in cash from the Echelon deal.

Moreover, the company has a strong operating cash flow.  With a healthy stream of cash coming in and management’s focus on improving the balance sheet, we believe BYD is in reasonable financial shape.


As with any investment, BYD does have a few risks.

Gaming regulations could change and impact possible revenue opportunities with the online gaming market.

Also, a downturn in the economy could slow demand for gambling and other entertainment services.

Finally, if interest rates move higher, it could impact the company’s debt payments negatively and hurt profits.


Boyd Gaming has been a successful casino and gaming company for 25 years.  They have a strong presence in Las Vegas and in the regional and local casino market.  Best yet, the company is well positioned to capitalize off the legalization of online gambling in the US.

Yet, at a current price of $7.00, BYD shares are trading at just 0.50x book value and 0.24x sales.  Those ratios are low no matter what industry you’re analyzing.

To put in perspective, one of the industry’s leaders, Las Vegas Sands (LVS), is trading at 5.9x book value and 3.8x sales.  And LVS has roughly the same cash to debt ratio as BYD.

No matter how you slice it, BYD shares are cheap.

With the upcoming opportunity in online gaming, there’s no reason BYD can’t return to its three-year high of $14.85.

Based on our analysis, we see BYD trading up over $14.85 a share.  Buy BYD shares now for potential gains of 100% or more!


BUY Boyd Gaming (NYSE: BYD) up to $7.70 per share.

Recent price is $7.00

Use a stop-loss of $6.00 on this position.

Don’t forget your position sizing and stop-loss rules.


Portfolio Update

Here are some highlights from the past couple weeks…

  • Five Star Quality Care (FVE), Crimson Exploration (CXPO), Nautilus (NLS), and Carriage Services (CSV) have all hit new highs.
  • Carriage Services (CSV) issued a $0.025 dividend on February 11th, and recently hit an all-time high of $19.21, a 266% gain!


Category: PSB Monthly Issues

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