Positive Growth Outlook for Boyd Gaming Corporation

The following article by Cornell University School of Hotel Administration student Eunji Kim was originally submitted as a paper for a class entitled "Investment Analysis and Portfolio Management," in which students wrote a 'mock' analyst note about a publicly traded company. In no way should its contents be construed as conveying professional investment advice.

BOYD GAMING CORPORATION

Boyd Gaming Corporation (NYSE: BYD) is a leading casino entertaining company that owns, develops, and operates hotels and casino in the United States. Based in Las Vegas, Boyd Gaming Corporation operates 16 gaming entertainment properties in six states: Nevada, New Jersey, Mississippi, Louisiana, Indiana, and Illinois. As a family-owned company, Boyd separates itself from the other competitors and focuses to create growth for the stakeholders.

• Long-Term Strategy: Boyd’s business strategy is to evaluate growth opportunities for developing gaming operations in existing and/or new markets by renovating existing facilities and acquiring other entertainment companies. In January 2006, Boyd announced the Echelon project to implement. In February 2007, Boyd completed the transaction of Barbary Coast. In March 2007, Boyd completed the acquisition of Dania Jai-Alai and announced to expand at Blue Chip.
• Growth Opportunities: On January 4, 2006, Boyd announced to develop Echelon to replace the dated Stardust. Scheduling to open Echelon Place in early 2010, Boyd demolished the Stardust in March 2007. However, because of the financial strain in the market today, Boyd suspended the project and planned to resume by 2009. In addition, Boyd purchased a 40-acre site in the west of I-15 in North Las Vegas for future development.
• About the Company:

INVESTMENT THESIS: BUY

Based on our valuations—Gordon Growth Model, discounted cash flows analysis, comparable companies analysis, replication analysis, and technical analysis—we priced BYD at $13.60, which suggests that BYD is undervalued compared to the settlement price of $5.75 (10/30/2008). Thus, we recommend buying BYD.

• According to all valuation models, the price per share value for BYD is currently undervalued. The Gordon Growth Model projects a value of $11.25 per share. The Discount Cash Flow analysis projects a value of $16.92 per share.
• Compared to its competitors, Boyd is undervalued according to our comparable company analysis, which gives us a value of $9.56 per share. Using the same comparable companies, our replication analysis gives us a share value of $16.65.
• According to the technical analysis, Boyd has been oversold recently. Thus, we recommend a Buy.
• Investment Rationale: Based on our analysis, we concluded that the growth prospects have not yet realized in the current price, and the price is undervalued. Hence, we recommend on buying BYD.

GROWTH OPPORTUNITIES

Boyd Gaming Corporation constantly seeks growth opportunities to develop and create positive growth and returns for the stakeholders. The most current pipeline project that is announced by Boyd is the Echelon project. This project is to obtain long-term growth in their Las Vegas Strip development. Although Boyd temporarily delayed the project, Boyd is planning on resuming the construction by 2009—when the economy recovers.

In addition, we expect growth from a $130 million expansion of Blue Chip in Michigan City, India, that is expected to open on January 22, 2009, and from the recent completed project: Borgata and the Water Club in the Atlantic City.

GORDON GROWTH MODEL

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The Gordon Growth Model (GGM) is a perpetuity formula: the components of the formula are dividend, cost of capital (equity), and growth rate. For this model, we have used the dividend of 10/30/2008 to forecast the expected share value of the company. We have projected the dividend growth rate based on the annual sums of dividends: from this, we have found that annual dividend growth rates decreased from 2003 to present.

The cost of capital was calculated by using the Capital Asset Pricing Model (CAPM): first, we calculated the returns from the historical adjusted closing prices of BYD and the S&P 500 index, which we use it as a proxy for the market. From this, we calculated the standard deviation of returns, the correlation between BYD and the market, and the beta, which is 0.633. Based on our calculations, the estimated value using the Gordon Growth Model is about $11.25 per share.

VALUATIONS

We used four valuation methods to predict the expected share value of Boyd Gaming Company. We derived a price of $11.25 from our GGM. Based on our discounted cash flow analysis (DCF), the derived price of BYD was $16.92, assuming a beta of 0.633 and a cost of equity of 7.33% from our CAPM calculation. From our comparable company analysis, the derived price was $9.56. Based on our replication analysis, we derived the average price of $16.65. Averaging all prices from three methods, we have a target price of $13.60.

DISCOUNTED CASH FLOW ANALYSIS

We created a pro forma statement that projects 10 years for Boyd. We chose 10 years to project out because Boyd has the future growth that has not been realized, and Boyd has not fully matured compared to its competitors. Also, in 10 years, Boyd can accurately valuate its revenue, with the Echelon project completed and the economy restored.

Creating a pro forma came with many assumptions. Some of the major assumptions that we made are the following: gaming revenue, gaming expense, selling general & administrative expenses, and Gross Properties and Equipment.

From 2008 to 2009, we projected the negative growth in gaming sales. This projection is appropriate because the net revenue fell by 13% compared to last year, and it would take some time for the economy to recover. From 2010 to 2013, the gaming sales will gradually increase because the Echelon is expected to open in early 2010. From 2014 to 2017, we projected that the gaming revenue will grow at a constant rate—the terminal growth rate of 2%--because the gaming market, by then, would most likely to be saturated. Our terminal grown rate is 2%: we assumed our terminal growth rate to be slightly less than the estimated GDP growth of 2.5%. For the gaming expenses, we predicted them to be directly related to the gaming revenue; hence, they will decrease or increase at a same rate with the gaming revenue. The selling general & administrative expenses are also predicted to move in proportion to the gaming revenue.

We projected the Gross Properties and Equipment to decrease over time. Currently, Boyd suspended the construction of the Echelon due to the financial strain in the market. In addition, Boyd already purchased a 40-acre site in North Las Vegas for future development. Thus, Boyd does not need to purchase more properties.

Based on these assumptions, the free cash flow to equity was calculated, and we discounted this at the cost of equity that we derived from the CAPM. Thus, from our DCF analysis, we derived a value of $16.92 per share for Boyd.

COMPARABLE COMPANY ANALYSIS

We chose five companies to do comparable company analysis: Las Vegas Sands Corporation (LVS), Penn National Gaming Inc. (PENN), Trump Entertainment Resorts Inc. (TRMP), Isle of Capri Casino Inc. (ISLE), and MGM Mirage (MGM). Due to the similar objectives of expanding and characteristics in the gaming industry, these companies were chosen. Although some companies are operating both nationally and internationally and larger or smaller than BYD in size, BYD considers them as its competitors.

For this model, we have used following metrics: P/E, P/B, P/Sales, P/EBITDA, and P/Employees. Since we are valuating the price of a stock, we chose these metrics. Also, these are commonly used metrics to valuate the price of a stock. Based on this model, we derived the price of $9.56 per share.

REPLICATION ANALYSIS

We used the same five comparable companies to replicate the price of BYD. Under three scenarios, we derived an average price of $16.65. We used different metrics to create each scenario: for the profitability, we used Profit Margin and Operating Margin; for the size metrics, we used Sales, Market Capitalization; other metrics that we used are P/E, P/B, P/Sales, EV/EBITDA, Cash per Share, and Revenue per Share.

TECHNICAL ANALYSIS

We have used technical analyses to further support our recommendation: relative analysis, Bollinger bands, and MACD. The Relative Performance graph explains how BYD had been doing relative to the market: we see that the graph is below 20% at the end of the line. The line below 20% indicates that BYD is oversold, which means we should buy BYD.

The upper and lower bands during the end of October 2008 in the Bollinger Bands graph appear to be converging, which suggests that something—bullish or bearish movement— will occur in the market. Although we can’t predict which scenario will occur, we are convinced that the market will move.

From the MACD graph, we observed that MACD line crosses the EMA 9 line at the end of October 2008. This crossing indicates a bullish signal—the positive momentum— which further supports our recommendation to buy BYD.

In general, the technical indicators appear to support our recommendation to buy BYD.

RECOMMENDATION

Boyd Gaming Corporation is a gaming entertainment company that seeks growth opportunities to expand and become a leader in their industry. With recent completed projects and current pipeline project, Boyd has a positive growth outlook in the future. From all the valuation methods that we have mentioned, the price of BYD is currently undervalued compared to the settlement price of $5.75 as of 10/30/2008. Thus, we recommend a buy with a target price of $13.61.

Disclosure: no positions

Comments

[Robert Wein...:]

Interesting post. I do think the author is wrong in thinking that BYD is a buy. The problem as I see it is the author has not spent as much time on the property or in Las Vegas.

BYDs main property in Vegas and the second most important property are both off strip. This means that when Vegas catches a cold BYD gets pneumonia.

I wrote a post in my blog about how I walked a tour through the property about four times a day to see how they where fairing. It was not pretty. To fill rooms they are offering them at $25 weeknights and $50 Weekends.

As if that was not enough, City Center and other properties will be coming online in less than a year.

Also, applying TA to the stock its pretty clear what direction the weekly chart is in. Also this stock is under the 200 MA which also shows that money is moving out of this stock not into it.

I do feel that BYD could be a great buy at some point and maybe as early as 2009 but does not present a good risk to reward opportunity in my opinion for this trader.

2008 Dec 08 05:48 PM

[ksh777:]

Buy when everyone is afraid,
Sell when everyone is greedy. Buffet said something like that.

The trick is that sometimes fear is justified.
Boyd's price is way down. That is obvious.
As long as Boyd doesn't go into bankruptcy,
What is the worst that could happen?
When the economy gets better, Boyd will also be better.

All that mumbo jumbo, people are not rational when it comes to buying and selling stock. If that stuff meant anything, they wouldn't be teaching it in school.

2008 Dec 11 04:59 AM