The House Always Wins: 5 Reasons Why Boyd Gaming Is A Buy

| About: Boyd Gaming (BYD)
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Since writing my last article advocating a bullish stance on Boyd (NYSE:BYD) (at $6.38/share) behind their powerhouse Atlantic City casino Borgata, Boyd has been up almost 15% and back down again. Today, Boyd is sitting in the $6.80's.

From Boyd's website. "Founded in 1975, Boyd Gaming Corporation is one of the largest and most successful casino entertainment companies in the United States. We currently own and operate 22 gaming properties in eight states - Nevada, New Jersey, Illinois, Indiana, Iowa, Kansas, Louisiana and Mississippi. One of the most respected names in the gaming industry, Boyd Gaming prides itself on offering guests an outstanding entertainment experience, all delivered with the unrivaled attention to customer service that is known as Boyd Style."

(Click to enlarge)

In my previous article, I cited two reasons that I thought the Borgata was going to be a catalyst for Boyd's success:

1. Revel Casino is Screwed

Revel was supposed to be the big casino in Atlantic City that was going to give Borgata serious competition. Millions watched to see if Revel was going to be the palace to dethrone Borgata's run as top revenue producer in AC (Revel recently placed 11th out of 13 casinos in gaming revenue). With hundreds of millions in grants and support from the New Jersey government and a sizable endorsement from the sizable Governor, it's now found itself in bankruptcy.

2. Borgata's In-Room Gaming Will Revolutionize Casinos

Welcome to the future. Borgata is leading the charge on in-room gaming, essentially a system that turns your television into a virtual casino. Patrons can load an eWallet account on check-in and enjoy gaming while they're still in bed, waiting to go out, or not presentable to make their way down to the gaming floor.

The recent pullback in price, to me, says more opportunity for investors that want to hold long. Here's 5 more reasons that I remain bullish on Boyd.

1. Online Gaming Will Generate Hundreds of Millions

I had started to touch on this revenue stream in a sense with the in-room gaming. Basically, gamblers in New Jersey are going to become revenue sources even when they're not on the casino gaming floor. The possibilities are endless and this is a really big deal.

CEO Keith Smith said:

With respect to market size, I think it's been reported of being anywhere from $200 million to north of $1 billion in New Jersey. We certainly, with our brands and our partnership with bwin, would expect to get more than our fair share of the market. So we're excited about the opportunity and we look forward to it.

Just think, at a casino poker room, you're limited to about 25 tables on average (the Borgata has many, many more). At any given time, depending on how busy the casino is, you're likely to have half of them running and collecting rakes for the house. The number of people physically in Atlantic City at the time determines directly how much rake can be pulled in. With online gaming, you're tapping into everyone that's of age and has the means to play in the state -- all day, every day. Casinos can be multiplying their rakes exponentially -- and this is just in poker. It'll kill the neighborhood Friday night poker game, but it'll be great for Boyd.

Now, take that growth prospect and apply it to every other game and slot you see on the casino floor.

PokerStars has tried to get its share of the loot, with its parent company looking into Atlantic City properties as well, but it looks as if current casino owners are muscling it out.

2. Boyd Has Just Sold Two Money Losing Assets

Boyd is getting leaner and meaner, trying to get their business to start humming. Jonathan Verenger, in his extremely well written article casually (read: violently) suggesting considering buying Boyd, "Buy Boyd Gaming Hand Over Fist", nails the EPS implications of selling these assets:

Management is hell bent on paring down non-performing assets and focusing on core performing assets. Its strategy is centered around stronger economies in the Midwest and South and on capitalizing on the online gambling movement. To this end, in just the past week they have sold off two assets:

(1) Dania Jai-Alai for $66 million

(2) Echelon site on the Las Vegas strip to the Genting Group for $350 million in cash

Dania Jai-Alai

Sold for $66 million to Dania Entertainment LLC. BYD management stated on the conference call that this property was operating at a $4 million annual loss. Removal of this property should boost EPS $0.05 going forward.


The sale of this property includes the 87-acre land lot as well as any improvements to the site. BYD will take a non-cash impairment charge of $994 million as a result of this sale and they will increase cash by $157 million after paying a portion of their proceeds to LVE Energy Partners. On the conference call the company projected annual savings of $16 million associated with storage costs, insurance costs, and property taxes that they will no longer have to incur. This should boost EPS $0.20 going forward.

CEO Keith Smith, in their Q4 conference call answered a couple of questions in regards to the sale of assets and continued to emphasize and re-emphasize the importance of strength in the balance sheet. He said:

Well, look, we're very excited by this sale and being able to monetize this as a non-core, nonstrategic asset. We think a lot of transactions -- sale price is always a process of negotiation and at the end of day, we think it's a very fair price for the site, allows us to deleverage, pay down some debt and it's going to offload some recurring maintenance costs that we have on the site and focuses us on our number 1 goal of improving our balance sheet. So overall, we're very pleased with the transaction.

3. Strength in the Balance Sheet is Priority #1

The company seems to have a keen realization that in these tough economic times that strength in the balance sheet is going to provide a great foundation for both investors and the company. It is one of the building blocks that makes a company appealing to investors; like a warm security blanket at night.

From its Q4 conference call, CEO Keith Smith said:

Second, the sale of the Echelon site is yet another important step in the comprehensive strategy focused on achieving our number 1 priority, which is strengthening our balance sheet and improving our financial position. Whether it's through repaying debt, making strategic acquisitions or realizing improvements to our core business, we're keenly focused on this goal.

The purchasing of Peninsula Gaming, which closed in November of 2012 should also help strengthen the balance sheet. This property could generate upwards of $400 million in revenues.

4. Continued Focus on the Customer

Smaller can sometimes be better when it comes to delivering a solid customer experience, something that Boyd has nailed to a tee judging by the service offered at the Borgata in Atlantic City. The customer experience delivered there is second to none; they outdo every other Atlantic City casino in several metrics:

  • The rooms are much nicer
  • The TV's are bigger and better
  • The view is better
  • Staff is more attentive
  • Premium beer/liquor is offered to gamers for free, not just garbage
  • Dealers are more attentive and have a better grasp on the game
  • Patrons and staff alike are "more desirable" looking

From their Q4 conference call, CEO Keith Smith said:

Our success as a company begins with delivering an exceptional experience to every customer and on challenging ourselves to keep improving what we do best.

Anytime a company sells assets, it can focus more on the properties that it does have. I recently touched on this correlation when recommending Kona Grill (NASDAQ:KONA) for my 2013 Bullish Portfolio. In regards to Kona, I stated:

What I like about Kona is that all of their locations are making money hand over fist and they have barely any debt. They have margins around 18% and everywhere they seem to open a new location they are finding success. The reason behind this is believed to be how slow they are rolling out nationwide. As noted in their investor presentation they have :

  • 23 restaurants across 16 states

  • Average unit volume: $4.2 million

  • Nationwide opportunity of 100+ locations

This is a company that is not offering franchise opportunities because they want to grow slowly and organically, focusing on their service and what makes them unique. They're not rushing -- and this is going to yield them consistent results. Kona is the most promising restaurant stock for growth I've seen in years.

The point of all this copy and paste article filler is to emphasize the age old adage that keeping the customer happy is still what fuels serious success.

Ever play the board game Risk? It's a great analogy to companies expanding. It's about keeping it simple, concise, and excellent at the properties they have -- not spreading yourself too thin for fear of losing power.

If Boyd can maintain this priority or improve on it in the midst of selling off some assets, it's going to be a huge strength for them going forward (and they can continue to build their army in the Ukraine, too!)

5. In the Midst of Turbulence In New Jersey, Borgata is Still Kicking Ass

Hurricane Sandy was a major disaster for all businesses and homes on the Jersey shore. Boyd's call notes that they had to close operations at the Borgata for several days and lost over 5,000 reservations.

However, from their Q4 conference call, COO Paul J. Chakmak said:

Despite these challenges, Borgata continues to maintain its long-standing leadership role in Atlantic City, growing its market share by 160 basis points in the fourth quarter and achieving a 23% market share in January.

In Atlantic City, we remain the market's dominant operator and expect to benefit in the coming months as the area recovers from Sandy. We cannot control external factors like the economy or the competitive environment. But we can control how well we execute our operations and our core business and we remain keenly focused on finding new, innovative and cost-effective ways to drive new visitation to our properties.

This is like watching a stock rise continually in the midst of the market averages getting crushed. It's a sign of strength going forward for Boyd.


This investor still thinks Boyd is a buy. Long term call options could yield extreme gains due to the undervalued nature of the stock price. This now gives me a total of seven points as to why I like Boyd as a buy:

  • Borgata is crushing Revel
  • In-Room Gaming
  • Customer Service
  • Online Gaming Potential
  • Making the balance sheet a priority
  • Sale of money losing assets
  • Strength through tough economic times in AC

Considerable risk still exists here. As I pointed out in my last article, Atlantic City revenue as a whole is on the decline, Goldman Sachs has downgraded Boyd. This investor, however, remains bullish on Boyd. Best of luck to all investors, as always.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in BYD over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.