Boyd Gaming Stock Is a Good Bet on a Recovery in Gambling – Barron’s

The Las Vegas Strip, the neon-lighted gambling capital of the U.S., has essentially been shut down since mid-March, a casualty of the coronavirus pandemic.

Yet casino operators arent all created equal. For investors looking to bet on a recovery in gambling in the age of Covid-19, there may be an opportunity: regional casinos.

Boyd Gaming (ticker: BYD), in particular, appears to be well positioned for investors who are willing to be patient. It faces the same near-term hurdles as most gambling companies, but Boyd is helped by a geographically diversified portfolio of 29 properties across 10 states and sufficient financial flexibility.

You have to look past 2021 to a more normalized 22, says David Baron, a portfolio manager at Baron Asset Management.

The small-cap stock, recently at about $17, has been cut in half since the S&P 500 index peaked on Feb. 19 amid concerns that include when casinos will reopen and how full they will be in a world of social distancing.

The regional casinos are going to recover faster than Vegas because they are drive-to markets versus fly-to markets.

The company, based in Las Vegas and whose largest shareholder is co-founder and Executive Chairman William Boyd, hopes to reopen its casinos gradually on a scaled-down basis starting later this month or in early June.

Whenever these casinos do reopen, Boyd and other regional players will have some advantages over those with large footprints in Las Vegas.

For one thing, regional casinos draw customers from their local areas, typically within roughly 30 miles of the property, says Thomas Allen, an analyst at Morgan Stanley. A casinos proximity to its customers should be an advantage as air travel remains largely shunned.

*Since S&P 500 peak on 2/19/20; **As of Dec. 31.

Sources: Bloomberg, company reports

The regional casinos are going to recover faster than Vegas because they are drive-to markets versus fly-to markets, he says. And they are driven more by gamblers, instead of discretionary vacationers.

Nearly half of the visitors to Sin City traveled by air in 2018, according to the Las Vegas Convention and Visitors Authority. And 20% of those guests were international.

Unlike Las Vegasoriented companieswhich draw customers for restaurants, shopping, and entertainment, in addition to gamblingBoyd is much more of a direct play on gambling. Last year, 75% of its revenue came from gambling, with most of that coming from slots.

Another card Boyd and its peers can play is that their casinos are much less reliant on convention and group business than Las Vegas is.

Not everything is going Boyds way, however. Slot players tend to be older, Allen says, and may be more reluctant to go out and do leisure activities during a time when we are recovering from Covid-19 and before we have a vaccine.

Another worry is Boyds heavy debt load, which stood at $4.4 billion as of March 31 against $831 million of cashincluding $670 million it drew down on a revolving credit facility.

To save cash, the company has furloughed most of its 24,000-plus employees, suspended dividends and buybacks, and reduced its capital spending, among other steps.

The company said during its first-quarter earnings call late last month that its burning about $60 million of cash a month, a rate that looks manageable if business starts to resume later this spring or this summer.

The company didnt make its CEO, Keith Smith, available for this article.

Another factor for investors to consider: Casinos wont operate at full capacity when they reopen.

Its safe to assume you will see 40% to 50% of machines on the floor shut off for social distancing, says Carlos Santarelli, an analyst at Deutsche Bank who has a Buy rating on Boyd.

Still, this doesnt necessarily spell trouble for regional casinos.

In a recent note, Harry Curtis of Instinet said, Casinos will not reopen unless they can be cash flow positive from day one. He observed that the two highest line costs, labor and marketing, should be well below 2019 levels at the outset.

Boyds operations are split into three segments, two of which involve Las Vegas. One is hotels and casinos in downtown Las Vegas, north of the Strip. That segment relies on customers who fly in from Hawaii. But it accounted for only 6% of the companys 2019 earnings before interest, taxes, depreciation, amortization, and rents, or Ebitdar.

That weakness could be offset in part by Boyds casinos that cater to Las Vegas locals. These properties, which are off the Strip, accounted for nearly 30% of 2019 Ebitdar. Thats a market that should do better than the Strip, Allen says.

The third part of Boyds business is its regional casinos that stretch across nine states in the Midwest and South, including Louisiana, Mississippi, Ohio, Iowa, and Missouri. That unit contributed about two-thirds of 2019 Ebitdar.

One advantage Boyd has is that it owns most of its properties, meaning that it doesnt have to pay that much rent. This should give the company more financial flexibility if conditions deteriorate and it has to sell some properties and lease them back, an approach that rival regional operator Penn National Gaming (PENN) has used a lot more.

Santarelli of Deutsche Bank expects casino operators to struggle in the near term. Boyd, though, stands out as a name I dont think needs a lot to go right for the shares to be materially higher.

His 12-month price target: $22.

Write to Lawrence C. Strauss at lawrence.strauss@barrons.com

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Boyd Gaming Stock Is a Good Bet on a Recovery in Gambling - Barron's