Consensus PT for Boyd Gaming Corporation (NYSE: WORLD): $65. Our PT: $71 by the end of 1Q23 reflecting what we see as a late-stage pandemic easing against an impending recession.
What’s not quite ingrained? the current price
The early retirement slots customer segment in Las Vegas is less likely to be deterred by a recession, as both their regular retirement supply and the projected surge in the Social Security Cola buffer macro headwinds more than previously thought. Population growth, fueled by escaping high taxes and lifestyle challenges in many states, is sustaining population growth in Clark County, Nevada.
Between 2020 and 2022, Clark County’s population grew by 2.2%, well above the national average, which is flat. Demographers expect the trend to continue. The area’s long-term growth is expected to reach 30% between now and 2040. The demographic increase in new residents is a match for the most valuable potential players in the coming years.
The economic health of the Las Vegas macro economy will weather the recession better than most. While the pent-up demand spurt may wane a bit, we’re seeing a surge in conventions and meeting jobs fueling jobs, translating into strong local returns.
And the appeal of state tax policies is a plus to add to the discretionary income potential of existing and new residents.
- Boyd’s regional properties hold up as consumer cyclical dollar begins to tighten.
- The company owns 5% of the equity of Fan Duel unit of the global leader in online gaming Flutter Entertainment plc (PDYPF, PDYPY), which will eventually divest Fan Duel, now most recently valued at $11.2 billion, making it BYD’s equity is theoretically worth about $660 million. This is essentially free for BYD holders as earnings are calculated based on the performance of the 28 casino properties.
- His current ratio of 0.78 tells us that his ability to manage his $3.77 billion in long-term debt passes the test of solid liquidity going forward.
- It has $250 million in cash (mrq) and has resumed modest dividend payments. Cautious movements with free cash flows is an important management skill.
- Operating cash flow cash flow is $967 million (ttm) with leveraged free cash flow (“FCF”) of $487 million.
- BYD has no exposure to the Asian gaming markets that are still under pressure from China’s zero covid tolerance policy.
The company’s transactional mindset in driving growth is expected to continue. The timing of purchasing 50% of the AC Borgata in the early 2000s and selling equity to partner MGM in 2016 and using a portion of their $900 million in proceeds to make local market acquisitions of Vegas has paid off. We expect management to continue with expansion agreements through acquisitions.
TTM: Revenue reached $3.48 billion, wasting $1.21 billion in EBITDA. Given the swings of lockdowns, reopenings and lengthy re-ramps since 2020, we see this as an outstanding achievement in the US regional gaming space.
- BYD has no exposure to the Las Vegas strip. Obviously, many investors see this as a limitation on BYD’s outlook, given the strong, driving demand for both tourism and meetings that has taken Strip’s earnings recovery to new heights.
- However, it also eases a burden on BYD in a market that, while showing great vitality, will continue to experience that new supply with the arrival of the massive Resorts World property already open and the Fontainebleau property expected to open next year. fourth quarter of this year. .
- BYD’s lagging P/E put it at 10.20, one of the better valuations in the industry right now. MGM Resorts International (MGM) is trading at a P/E of 4.62, which is clearly a buy. But MGM still has exposure to the covid-pooled Macau market. We believe BYD’s multiple could endure a much larger valuation given the outlook for this fiscal year and further enhanced opportunities for 2023.
EV/EBITDA: 7.77 anyway, very healthy. As we have often noted, of all stats, this is the gold standard for casino operators.
Discounted cash flow value according to Alpha Spread: $67.84. Based on the current price, the stock is 23% undervalued.
At the time of writing, BYD is 71% institutionally owned. Analysts who have released three-month target numbers for the stock have ranged from a low of $64 to a high of $80. Our PT leans on the more bullish side as we view the stock as a value story against both the current price as the future position.
Fan Duel spin-off potential
While there has been no tangible change in Flutter’s public statements that a Fan Duel spin-off IPO was imminent, being developed, or even seriously considered, we continue to believe it will. Fan Duel is the market leader in sports betting with a total market share of approximately 51% of the US market according to their calculations.
BYD is now involved with the business as they are a provider of that vertical to BYD casinos. Fan Duel forecasts ~$3 billion in US revenue for 2022. More importantly, it became the first operator in the space to turn a profit last September. It earned $22 million and Flutter has said it expects the site to be fully profitable through the full year 2023. Meanwhile, it remains silent on a spin-off for various reasons, though adopted by savvy industry observers.
The first reason is connected to the complex arbitration process with Fox Sports, an early investor. The ongoing dispute is the overvaluation of the Fox stock. FLTR says it’s based on what Fox paid for its 18% of its stock when it bought it, and Fox claims the value is what its market cap is today.
The other reasons, according to our sources, are a reluctance for FLTR to move now that the company has just turned a profit. “They would probably want to wait until they have a whole year of most of it under their belts to show the huge profits that make each spin-off much more highly valued than it is now,” said a director of a competing platform.
Whatever the final solution, it seems that BYD management has once again made a very smart investment at the right time in the right place. Investors will benefit from this longer term, but they will still buy BYD at a price essentially based solely on their casino business. “These guys know how to move their money way better than many of their peers in space,” an investment banker who had worked on previous BYD deals reportedly said.
Our final take: BYD now belongs in any balanced gaming portfolio: strong buy and overweight because of what we believe will be a steady increase in revenue and EBITDA.