Boyd Gaming: A Turnaround Story

May. 6.11 | About: Boyd Gaming (BYD)

At we’re always looking for stocks that have low relative valuations with a potential catalyst to drive the stock price higher. We especially like it when we can find an information advantage or edge over other investors. We have been following Boyd Gaming (NYSE:BYD) ever since 2001, and have been waiting for the right time to purchase its stock again when the effects of the recession have finally turned. We believe that time is now and we have advocated purchasing the stock with a 12-18 month time frame.

The casino sector in stocks has been an absolute disaster since the end of 2007. The Las Vegas casino companies took on too much debt, built too many high-end rooms and had no clue they were about to enter the worst recession since the 1930s. I personally lived in Las Vegas, from 2001, until 2004, and have followed the casino sector since 1993. One of the stocks that I really scored with in 2004 and have always liked was BYD. Boyd Gaming merged with Coast Casinos in 2003, which focused on the local market in Las Vegas, so it made a company that had some Las Vegas exposure much more Vegas centric. The local market in Las Vegas is mainly residents of Vegas and is frequented by people who work within or related to the casino industry. That was a great move then as the Las Vegas economy was on steroids from 2003 until the crash. Boyd was one of the few companies with a Las Vegas focus that remained profitable - even if only slightly - throughout most all of the recession.

Las Vegas was more than just the center of the housing bubble from 2003-2007. It was benefiting from the credit bubble, the hosing bubble, the easy money in consumer’s pockets and a false prosperity. It has taken years for the companies to right size themselves and adjust to the new environment. Boyd Gaming was hit hard because it is basically viewed as a Las Vegas local’s player. The stock fell from $54 to as low as $3.10 in 2009.

We really like Boyd Gaming management because they are always honest about their business and they made a move that saved their company. In 2006 they had embarked on a $5 billion Las Vegas strip project called Echelon, but when they sensed the economy tanking, they halted the project. If they hadn’t they probably would have wound up in bankruptcy court. That took an incredible amount of maturity to admit their mistake - unlike MGM Mirage, whose $9 billion City Center project was continued and it has destroyed that company; it was once hours away from bankruptcy. It still has 88 acres of prime strip frontage land and a shell of a hotel that was started, which is still a valuable asset but whose value has probably plummeted from $1 billion to $200 million. Executives don’t expect to resume the project for at least a few years so it isn’t a major concern now but they did throw about $500 million down a rat hole.

Boyd Gaming had an earnings report and conference call this week and said what I have been waiting years to hear from them to buy the stock. There are real signs of the Las Vegas economy getting better with 10,000 jobs added, the unemployment rate falling and housing prices stabilizing. This was confirmed by MGM Mirage (NYSE:MGM) the next day in its earnings report. The Las Vegas locals market is heavily dependent on how the strip hotels perform. While gambling revenues have been weak they are growing slowly for the first time in years. More importantly visitor counts, spend per room day and room rates are creeping up slowly. Boyd Gaming also summarily dismissed my big fear, which is gasoline costs hurting the business. They see no correlation and they were very adamant, which was surprising.

Remember when we look for a stock we look for an informational edge over other investors and analysts. Here are some of the things we know about this company, that most investors don’t. While 5000 of 7000 rooms are in Las Vegas, it also has a nice presence in the Midwest that is turning around now. It has a nice mix of properties in Las Vegas, from downtown casinos, near-the-strip casinos and suburban casinos, to capture different class levels of play. The property in Atlantic City, the Borgata, is the best in that market but Atlantic City is in a decline and is the company's weak spot.

All analysts are negative on the locals market and this company - so that can provide good upside as the story plays out. In fact we were shocked that the analysts on the call were not focusing on how positive the company was sounding for the first time in years. The stock is up 9% from $8.80 to $9.60 since the conference call. We have an $11.50 price target, which gives this stock a potential 20% upside with a very low level of risk. That is why we’re pounding the table on this stock as long as it is under $10 and we have the largest weighting of the stock in our model portfolio.

Disclosure: I am long BYD.