Take a Gamble on Boyd Gaming

Boyd Gaming Corporation (BYD) operates as a multi-jurisdictional gaming company in the United States. As of December 31, 2007, it owned and operated 16 casino facilities located in Nevada, Mississippi, Illinois, Louisiana, and Indiana. The company also owns and operates two travel agencies; a Hawaiian-based insurance company that underwrites travel-related insurance; and an offsite sports book located in Las Vegas. In addition, it is a 50% partner in a joint venture that owns a limited liability company that operates Borgata Hotel Casino and Spa in Atlantic City, New Jersey. The company was founded in 1988 and is headquartered in Las Vegas, Nevada

Recent Financial Results

Latest results from BYD came on Wednesday, February 27th, and seemed to disappoint many on the street (see conference call transcript). Although Boyd’s fourth quarter of 2007 profit exceeded analyst estimates, the adjusted results still missed analyst estimates by just a small margin – enough to cause investors to sell the stock it seems. Looking at the hard data, earnings dipped to a level of $31.2 million, or 35 cents per share, compared with $56.3 million, or 64 cents per share, in the prior year’s fourth quarter.

Income from continuing operations came to $31 million, or 35 cents per share, from $55.6 million, or 64 cents per share. Analysts had been expecting net income of 37 cents per share. The Company noted that year-ago results benefited by a one-time 18 cent per share upward adjustment.

Quarterly revenue fell just slightly to $478.6 million versus $520.8 million a year ago, which also missed Wall Street's estimate.

Looking forward, BYD is in a building phase, with its new Borgata expansion due to open in June of 2008. The Company released a first quarter 2008 net income estimate of 30 to 35 cents per share, and the Company’s 2008 expected results (full year) are up near $1.50 per share.

Boyd’s balance sheet fundamental picture is reasonably strong, although most all of the casino operators carry some level of debt to fund their massive gaming hotel construction projects. BYD currently has about $152 million of cash on its books, equivalent to about $2 per share, and a level of $2.2 billion in debt. BYD’s cost of this debt is roughly $330 million per year, but like many casino operators, BYD is very profitable on a gross margin basis, and covers this interest cost about 1.5x from its annualized trailing twelve month EBITDA figure of $480 million (period ending June 30, 2007).

At the present level of $1.8 billion market cap, BYD also makes a possible acquisition candidate. Such speculation is beyond the scope of this report; however, it does show that there is a comfortable level of value represented in the current BYD’s share price relative to other companies in the industry. During August of 2007, an investment arm of a Dubai fund bought into the MGM Grand group to the tune of about $5 billion. We feel that other acquirers from foreign soil may be interested in entire groups of operating properties like BYD as well.

Investment Recommendation

We recommend that investors accumulate BYD shares at or below $21.50 per share, with a target exit price of $35 or greater per share. This valuation is based on a 20x multiple (roughly two times the annual top line revenue growth rate) for the $1.60 that BYD is expected to earn next year. (2009’s annualized expected levels).

Below are some ideas on call options investors may want to evaluate.

Multiple Trade Ideas

Buy the stock outright: We would commit 50% of the capital balance investors would like to commit to this company at present levels on Tuesday, March 4, 2008, at or below $21.50, and then look to add another 50% position if the stock price declines due to overall negative market activity. The two-stage buy recommendation is based upon possible activity in the stock and market declines that may occur that don’t necessarily have anything directly to do with BYD.

Stop loss: We would also put a stop loss sell order on the shares acquired at these levels recommended above, at a price of $19.05 (approximately 10% down from market price). IF you write calls against your holdings, you must buy back your written call at this point or face the risk of an uncovered call’s potential loss.

Long calls: Options buyers looking to participate here may buy the BYD June 2008 $22.50 strike Calls. Current price is roughly $1.50 to $1.60 for these contracts. We would look to sell them at $5.00 or higher in the near future.

A Very Interesting Play

The January 16, 2010 LEAPS in BYD at the $20 strike price are currently asking $6.80. This is a $5.60 premium to intrinsic value (intrinsic is $1.20), and may represent a great opportunity for returns over a long-term period (roughly 2 years). The breakeven price for this trade to become profitable would be at BYD share price $26.80…and we remind you, this was a $42 stock six months ago.

Please note: Options trades all involve a high degree of risk and the potential to lose some or all of your investment. These recommendations are general in nature, and you should consult your own financial professional who is familiar with your situation as to the appropriateness of these trade ideas.

Disclosure: Analyst has no position in BYD stock, but may acquire 2010 dated LEAPS on this name in the near future.

Comments

[Rick -Boston]

I am slowly buying into Boyd's stock based on a "hoped for" increase in value after Boyd completes its $3.3 billion Las Vegas luxury joint venture, Echelon Place, and a pick-up in the economy.

I also like a stock that has the confidence to pay a dividend. Unlike other gaming stocks, BYD is currently paying $0.15 per share per quarter, for a yield of 2.846%. (Based on the 3/3/08 closing price of $21.08). That compares pretty well to the 3.53% that I am currently getting on my Fidelity Money Market Fund.

Finally, I like to follow the news updates about my investments each day, and the gaming industry is interesting. This is sort of a way for me to vicariously gamble, but hopefully with the house odds.

But don't overlook that BYD is risky. They face more and more competition and regulation, and funding their expansion could get tough in this credit market.




But th