Boyd Gaming (BYD), based in Las Vegas, owns and operates 24 gaming entertainment properties, with another under development. The company’s properties are located in Nevada, Mississippi, Indiana, Illinois, Iowa, Kansas and Louisiana. With a market cap of about $3.3 billion, BYD is generally considered a mid-cap growth stock.

INVESTMENT THESIS

In our opinion, Boyd possesses some of the gaming industry’s best properties. We expect strong earnings growth in the Las Vegas locals market (caters to families and residents) to provide a catalyst for the shares. In addition, we believe Boyd could be acquired by a private equity investor. We expect the company’s earnings to benefit from solid results at Treasure Chest and Delta Downs (both in Louisiana).

RECENT DEVELOPMENTS

On October 27, Boyd Gaming reported net revenues of $588 million, below the consensus estimate of $592 million. Boyd Gaming reported third-quarter adjusted EBITDA of $140 million, in line with the consensus estimate. During the third quarter, the company bought back 600,000 of its shares. Adjusted earnings increased year over year from $0.16 to $0.22 per share, in line with the consensus estimate. Solid revenue in the Las Vegas Locals segment, an increase in corporate expense and a property renovation in June led to the company’s strongest third quarter in a decade.
BYD paid a quarterly dividend of $0.05 in October, for a dividend yield of 0.7%.
Management also maintained its current share repurchase program. Despite payouts for dividends and share repurchases, Boyd still expects to reduce its leverage.

EARNINGS & GROWTH ANALYSIS

During the conference call, Boyd Gaming maintained its EBITDA guidance range of $585-$605 million, but expects EBITDA to come in near the top end of its range. Boyd also reiterated its estimate of $62 million EBITDA for the Alliante/Cannery properties. Over the next 2-to-3 years, BYD is aiming for a 2.5% to 3.0% margin improvement. Our 2017 and 2018 estimates are $1.40 and $1.60 per share, respectively.

RISKS

Boyd faces the risk that states near the company’s existing operations could legalize or expand gambling activity, leading to increased competition. Another risk is a terrorist attack or the threat of terrorism, which could cause tourists to cancel or curtail their travel plans. Lastly, severe weather could force the company to temporarily close some of its casinos.

VALUATION

At its current price, in our opinion, the share price inadequately reflects prospects for improvement in the Las Vegas locals market and the benefits of future projects. Our sum of the parts valuation generates a target price of $35. We use an EBITDA multiple just above 9 to establish a share price of $26. We believe this relatively high multiple is warranted in light of high selling prices on gaming properties near BYD’s Las Vegas locations. Reflecting expansion opportunities, we add another $9 per share, which brings us to our $35 target price. We believe investors have recognized only a portion of Boyd Gaming’s growth opportunities in Florida, Nevada, and Louisiana. Our target price, if achieved, offers investors the prospect of a more than 19% return.

Boyd Gaming (BYD)

Current Price: $29.52

Target Price: $35

Current Valuation: 18.5 times FY18 EPS

Target Valuation: 21.9 times FY18 EPS