Boyd Gaming: Too Much Leverage For This Economy

| About: Boyd Gaming (BYD)

With Boyd Gaming (NYSE:BYD) doubling over the past 4 months, I decided to take a closer look into the company to see if there is more upside ahead. Here are seven points I looked at while researching BYD:

Valuation: BYD’s trailing 5 year valuation metrics suggest that the stock is undervalued at these levels as all of the metrics are in the lower end of their 5 year ranges. BYD’s current P/B ratio is 0.6 and it has averaged 1.0 over the past 5 years with a high of 3.2 and low of 0.3. BYD’s current P/S ratio is 0.3 and it has averaged 0.7 over the past 5 years with a high of 2.1 and low of 0.2. BYD has not been profitable the past year so it does not have a trailing P/E ratio.

Price Target: The consensus price target for the analysts who follow BYD is $7. That is downside of more than 20% from where the stock is currently at. This suggests that BYD is over valued at these levels.

Forward Valuation: BYD is currently trading at about $9 a share and analysts project that the company will earn $0.27 per share next year for a forward P/E of over 33. Revenues are expected to rise 6.9%. By any stretch of the imagination, that is a high multiple, partly because of BYD’s enormous debt load. With that, a better comparison valuation metric is EV/EBITDA.

EV/EBITDA: Boyd Gaming is trading at a 9.3 EV/EBITDA ratio. MGM Resorts (NYSE:MGM) is currently trading at a 13.8 EV/EBITDA ratio. Penn National Gaming (NASDAQ:PENN) is trading at a 7.2 EV/EBITDA ratio. Las Vegas Sands (NYSE:LVS) is trading at a 12.7 EV/EBITDA ratio. This metrics suggests that BYD is undervalued as the average ratio of the three comps is 11.2.

Debt: It also makes sense to take a closer look at the debt and leverage ratio. BYD has a lot of leverage. BYD had debt of $3.4 billion at the end of last quarter and a trailing EBITDA of $420 million for a debt/EBITDA ratio of 8.1, a very high figure.

Price Action: The stock was trending down in the first half of last year but the trend really accelerated in July and August, falling 50% from $10 a share to $5 a share. The stock then had a brief respite and then continued falling in October, falling below $4.50 a share. Since then, BYD has post a nice rally and is up more than 100% off October lows and is now just below $10 a share. The stock is above its 50 day moving average, which sits at $6.72, and its 200 day moving average, which is at $7.39. The $10 level will serve as strong resistance on the upside. On the downside, the $7.50 level is strong support followed by $7 a share. Notably, they are right around the 50 day and the 200 day moving averages.

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Conclusion: The valuations are inconclusive as the trailing metrics and the EV/EBITDA ratio suggest that the stock is undervalued but analysts suggest the stock is overvalued. With the leverage BYD carries, the financial risk skyrockets. If the economy stumbles again then BYD may run into trouble with its creditors. Conservative investors try to stay away from these situations; however, if you are bullish on the economy or BYD’s properties, then this may be the place to be. The leverage works both ways and will really help boost returns as the company’s results return to a more normal level. Note, the stock now is a bit extended so may be wise to wait for a pullback before initiating a position.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.