Boyd Gaming (NYSE:BYD) owns 22 different gaming properties in the US. However, it's prize possession is the Borgata in Atlantic City. In 2009 the Borgata earned $105 million in net income and $175 million in free cash flow. It is generally considered the most hip and relevant casino in Atlantic City.
Boyd owns a 50% stake in the Borgata. The Borgata features 2,000 guest rooms, 182 tables, and 3,475 slot machines. It also has 12 restaurants, a huge spa, 4 nightclubs, and a 70,000 square foot event venue. It is an enormous property.
What has me most excited about this is the opportunity it has ahead of it with online gambling and how I think BYD a buyout target.
On February 26, 2013, New Jersey is widely expected to pass a new law which will allow online gambling. The law will work as follows, per Newsworks:
Those who want to gamble via the internet will first need to set up an account with a casino offering online play. All accounts will be in the legal name of individual applicants who must establish proof of age and have a principal residence and email address. The state's Division of Gaming Enforcement will license, regulate and enforce all aspects of authorized games done through the internet, said Christopher Donnelly, spokesperson for the Senate Majority Office.
After they are approved, gamblers will next need to fund that account using a credit or debit card before they can play. Casinos will not accept any wager that exceed deposited funds.
Holders of online gaming accounts will only be able to place bets while physically present in the state of New Jersey. However, one does not have to be a resident of New Jersey to participate in internet gaming. Whether hanging out in Haddonfield or Hoboken, all of New Jersey is fair game to any resident or visitor, so long as one has valid account and has a computer, tablet or smartphone to visit the casino's website. Gamblers will be able to play all current casino games, Donnelly said.
Any company that has a presence in New Jersey and a gambling license will instantly become more valuable the moment this law is passed. If you don't believe me, then ask yourself why PokerStars' parent, Rational Group US Holdings, is looking to buy a Casino in New Jersey.
The technical picture for Boyd is looking fairly bullish after bottoming in November 2012 at $4.75. The stock proceeded to rally about 60% into early February and then was smashed down on a downgrade by Goldman Sachs. If you follow any of my writings you will know how I view this downgrade (i.e., its most likely completely bogus and intended to create a buying opportunity for the firm). Here were their points, as shared in an article from yesterday:
(1) Boyd is susceptible to competition because 77% of its business is in traditional, regional gaming markets, and demand is struggling given its "core mid/low market consumer." Online gambling "could ultimately be big," Kent and Ahwoi say, but "it could take longer than expected to roll out and will be very competitive, with high promotional activity, which in turn could lead to lower-than-expected margins."
(2) The shares have been trading at a discount to their historical average of 8 times Ebitda, but Goldman maintains that the gambling business is a "more challenged business now than it was in the past." Shares of the company were up more than 12% in recent days, versus a flat return for the Standard & Poor's 500 Index, following news that New Jersey is passing legislation to allow online gaming. Boyd operates the Borgata casino in New Jersey, but Goldman says that while it may benefit, "we suspect the opportunity is much less than expected and will take longer to realize."
(3) Boyd's balance sheet leverage, with 6.5 times net debt to earnings before interest, taxes, depreciation and amortization, makes it more difficult to accomplish a transformative deal like conversion to a real estate investment trust. And an acquirer might not find that debt attractive.
Let's look at each point independently.
(1) Boyd is susceptible to competition but online gambling could ultimately be big.
Ok tell us something we didn't know there. Since when has the gambling business not been a competitive business? Why not focus on the fact that only companies with a presence in New Jersey and a gambling license can be allowed to offer online gambling?
(2) Goldman maintains the gambling business is a more challenged business than it was in the past in explaining why shares trade at a discount to historical averages.
If it is so challenging then why has Penn National Gaming (NASDAQ:PENN) grown revenues.
(3) Boyd's balance sheet leverage makes it difficult to become a REIT.
I don't think anyone considers this to be an option anyway, but if they did why not mention the value of their assets that can be sold off to help pay off the debt? The company currently trades at less than half book value and some of those assets don't take into account rising real estate values being reported across the country over the past 6 months.
My take on the GS report is pretty simple: I would not be surprised to see it being reported that they have taken a stake in the company and used the report to knock the stock down to offer a better entry point.
The downside risk to BYD is if New Jersey doesn't legalize online gambling. However, at 4 times free cash flow and 0.40 times book, I think far more negatives than positives are baked into the share price.
Another play on the online gambling movement is Zynga (NASDAQ:ZNGA). Their free online poker offering boasts 40 million users. Pokerstars, the leading online poker site, generates over $500 million in NET INCOME annually with only 10 million more players. ZNGA has $2 per share in cash and if they can monetize those users as well as Pokerstars does it could easily get back to $10+. However, chasing a stock higher after it gaps up is always a dangerous game. The odds are that the people who previously held the stock from lower levels are looking at the gap higher as an opportunity to sell the stock. The marginal number of new buyers inevitably gets smaller and smaller as a stock runs higher. With this in mind, I would buy the stock in piecemeal over the next few weeks.