Note: This report contains substantially new material. Subsequent reports will have changes highlighted
Reason for Report: 3Q09 Earnings Update Prev. Ed.: September 22, 2009; Mid-Quarter Update
Brokers’ Recommendations: Neutral: 84.6% (11 firms); Negative: 15.4% (2); Positive: None Prev: 10; 2; 0
Brokers’ Target Price: $8.56 (↓ $0.23 from the last report; 9 firms) Brokers’ Avg. Expected Return: 6.1%
Note: October 27, 2009; FLASH UPDATE: 3Q09 Earnings Update
*Note: Though dated November 2, 2009, share price and brokers’ materials are as of October 29, 2009.
Note: The tables below for Revenue, Margins, and Earnings per Share contain fewer brokers’ materials than the brokers’ materials used in the Valuation table. The extra figures in the Valuation table come from reports that did not have accompanying spreadsheet models.
Portfolio Manager Executive Summary
Boyd Gaming Corp. (BYD or the Company) is a diversified owner and operator of 16 gaming entertainment properties with operations in Nevada, New Jersey, Mississippi, Illinois, Indiana, and Louisiana.
Key factors determining the growth at the Company (in the past and vital for its future success) are as follows:
· BYD emphasizes on slot revenue, which forms the most consistently profitable segment of the gaming industry.
· Management’s comprehensive marketing and promotion programs.
· The four primary Las Vegas properties are well positioned to capitalize on the Las Vegas local market.
· Geographically diversified portfolio and strong balance sheet.
· The Company’s opportunistic and strategic acquisitions.
· An experienced management team.
84.6% of the analysts assigned neutral ratings on the stock and 15.4% had a negative stance. None of the stocks are rated positive.
Neutral or equivalent outlook (11/13 analysts or 84.6%) – Target prices range from $7.50-$11.00. The neutral analysts do not see much opportunity for a fundamental recovery in the near to medium term, primarily due to the weak operating momentum, limited earnings visibility, and strong competition. Competition is looming over several markets, including Indiana, Atlantic City, and the Las Vegas local market. However, despite these challenges, these analysts prefer BYD on a long-term basis, given its attractive collection of assets, extensive exposure to the Las Vegas locals market, robust projects in the pipeline, and proven management team. Moreover, these analysts consider the acquisition of part or all of Station Casinos to be attractive and believe that BYD has built a highly successful enterprise primarily through a history of well executed acquisitions and consistently generated the highest returns on capital in the industry. Also, these analysts feel that the company has a strong balance sheet and healthy liquidity position as compared to its peers. Most of the analysts based their valuation on some form of DCF analysis, EPS, or EV/EBITDA multiples.
Negative or equivalent outlook (2/13 analysts or 15.4%) – Target prices range from $6.00-$8.00. These analysts expect fundamentals at BYD’s Las Vegas Locals, Downtown Las Vegas, and US regional markets to remain soft for the balance of 2009, and into 2010, as a result of softer US consumer spending, rising unemployment levels, and elevated competition. These analysts remain cautious on BYD shares based on the given lack of visibility into fundamentals and catalysts for the stock.
September 22, 2009
Recent Events
On October 27, 2009, BYD announced its 3Q09 financial results. Key highlights are as follows:
· Net revenue decreased 6.6% y/y to $398.2 million in 3Q09 from $426.5 million in 3Q08.
· Adjusted net income was $6.3 million, or $0.07 per diluted share, in 3Q09 versus $8.7 million, or $0.10 per diluted share, in 3Q08.
Overview
Boyd Gaming Corporation (BYD or the Company) was founded in 1988 and is headquartered in Las Vegas, Nevada. The Company, together with its subsidiaries, operates as a multi-jurisdictional gaming company in the United States. The Company owns and operates 16 gaming entertainment properties located in Nevada, New Jersey, Mississippi, Illinois, Indiana, and Louisiana. The Company is also developing Echelon Place, a world-class destination on the Las Vegas strip, which is expected to be operational by 3Q10.
More information on the Company is available at its website: www.boydgaming.com.
Analysts identified the following issues as critical to an evaluation of the investment merits of BYD:
Key Positive Arguments / Key Negative ArgumentsRegional diversity – Boyd Gaming Corp. benefits from its regionally diverse mix of gaming properties. Its successful entrance into new markets positively reflects management’s ability to operate in a multi-jurisdictional environment. / Growing competition – Competitive supply in the Las Vegas locals markets and competition in New Orleans, Atlantic City, and Indiana markets result in limited earnings visibility and weak outlook.
Strong growth prospects from capital investments – Capital expansion projects at the Company’s Borgata and the Blue Chip Casino operations are well-timed defensive moves to retain market share against competition. / Sluggish operating trends continue – The analysts with a more cautious outlook toward BYD perceive weak operating trends as a considerable threat.
Borgata promises compelling growth – The immense popularity of Borgata and expansion programs will fuel future growth opportunities for the Company. / Difficult economic climates in Las Vegas and Atlantic City – The Las Vegas locals and Atlantic City market faced a downside as each market was affected by specific challenges.
Balance sheet – The company has a strong balance sheet and liquidity position compared to its peers.
Boyd Gaming Corporation’s fiscal year ends on December 31.
November 2, 2009
Revenue
According to the Company, net revenue decreased to $398.2 million in 3Q09 from $426.5 million in 3Q08, down 6.6%. The 3Q09 Company-specified figures are in line with the Zacks Digest averages.
Segment Revenue Details
Las Vegas Locals
According to the Company, the segment’s revenue decreased to $150.7 million in 3Q09 from $181.8 million in 3Q08 due to continued weakness in consumer spending, as well as significant declines in room rates. The 3Q09 Company-specified figures are in line with the Zacks Digest averages.
Downtown Properties
According to the Company, the segment’s revenue was $54.9 million in 3Q09 versus $55.6 million in 3Q08 due to the difficult economic environment. The 3Q09 Company-specified figures are in line with the Zacks Digest averages.
Mid West and South Region (previously known as Central Region)
According to the Company, the segment’s revenue was $192.6 million in 3Q09 versus $189.1 million in 3Q08. The 3Q09 Company-specified figures are in line with the Zacks Digest averages.
Joint Venture
Atlantic City: According to the Company, in Atlantic City, net revenue for Borgata was $222.6 million in 3Q09, down from $239.9 million recorded in 3Q08.
Outlook
One firm (BMO Capital) expects revenue to continue to be challenged for the Las Vegas Locals segment, given heightened and aggressive promotional activities from the competition.
Provided below is a summary of revenue as compiled by Zacks Research Digest:
Revenue($MM) / 3Q08A / 2008A / 3Q09A / 4Q09E / 2009E / 1Q10E / 2010E / 2011ELas Vegas Locals / $181.8 / $763.0 / $150.7 / $156.0 ↓ / $643.0 ↓ / $166.5 / $654.2 ↓ / $677.4 ↑
Downtown Properties / $55.6 / $240.2 / $54.9 / $59.2 ↑ / $230.3 ↑ / $58.8 / $232.9 ↓ / $235.3 ↑
Midwest and South / $189.1 / $777.7 / $192.6 / $188.0 ↓ / $786.0 ↑ / $204.4 / $801.9 ↓ / $848.4 ↑
Total Revenue / $426.5 / $1,781.0 / $398.2 / $404.3 ↓ / $1,660.3↓ / $429.6 / $1,689.1 ↓ / $1,761.0↑
Digest High / $426.5 / $1,781.0 / $398.2 / $423.9↓ / $1,679.9 ↓ / $440.5 / $1,732.5 ↓ / $1,775.0↑
Digest Low / $426.4 / $1,781.0 / $398.2 / $390.6 ↓ / $1,646.6 ↓ / $418.7 / $1,662.3 ↓ / $1,747.0 ↑
Digest YoY Growth / -13.0% / -10.8% / -6.6% / -4.3%↓ / -6.8%↓ / -1.2% / 1.7% / 4.3%↑
Sequential Growth / -7.4% / -5.9% / 1.5%↑ / 6.3%
Highlights from the revenue table include the following:
· For FY09, revenue forecasts range from a low of $1,679.9 million to a high of $1,660.3 million, with the Digest average being $1,660.3 million (↓as the previous estimate of $1,688.9 million).
· For FY10, revenue forecasts range from a low of $1,662.3 million to a high of $1,732.5 million, with the Digest average being $1,689.1 million (↓as the previous estimate of $1,725.7 million).
· For FY11, revenue forecasts range from a low of $1,747.0 million to a high of $1,775.0 million, with the Digest average being $1,761.0 million (↑as the previous estimate of $1,739.8 million).
A graphical analysis of segmental revenue is given below:
Please refer to the Zacks Research Digest spreadsheet of BYD for specific revenue estimates.
Margins
According to the Company, total adjusted EBITDA was $311.8 million in 3Q09, compared to $348.5 million in 3Q08. As per the Zacks Digest model, adjusted EBITDA was $96.2 million in 3Q09, down 2.8% y/y from $99.0 million in 3Q08.
Operating income in 3Q09 was $46.9 million as compared to $45.8 million in 3Q08. As per the Zacks Digest model, reported operating income in 3Q09 was $46.9 million as compared to $46.2 million in 3Q08 and pro forma operating income was $52.3 million in 3Q09 as compared to $55.9 million in 3Q08.
Corporate expenses were $9.2 million in 3Q09 versus $10.7 million in 3Q08.
Segment EBITDA Details
Las Vegas Locals
According to the Company, adjusted EBITDA was $31.4 million in 3Q09, a 31.3% decrease from $45.7 million generated in 3Q08. Reduced consumer spending and continued pressure on room rates impacted results.
Downtown Properties
According to the Company, adjusted EBITDA was $8.7 million in 3Q09 versus $6.9 million in 3Q08. Continued strength in Hawaiian customer segment, driven by refinements in targeted marketing efforts, as well as cost-control measures, contributed to gains in the region.
Mid West and South Region (previously known as Central Region)
According to the Company, adjusted EBITDA in the current period was $41.5 million in 3Q09, an increase of 6.2% y/y from the $39.1 million reported in 3Q08. The increase was attributable to strong performance at recently expanded Blue Chip property, as well as continued growth at Delta Downs.
Joint Venture
Atlantic City: According to the Company, Borgata's operating income in 3Q09 was $77.0 million versus $39.5 million in 3Q08 and adjusted EBITDA was $67.6 million in 3Q09, compared to $59.8 million in 3Q08.
During 3Q09, Borgata continued to expand its leading market share, while improved efficiencies and cost-containment initiatives helped the property to grow both operating income and adjusted EBITDA.
Outlook
One firm (Wedbush) reduced its FY10E and FY11E EBITDA to $414 million, down 5.9% from the prior estimate and $450 million, down 6.1% from the prior estimate to reflect a downward revision of FY10 and FY11 revenue estimates to $1,685 million, down 2.4%, and $1,759 million, down 3.2%, respectively, and lower margin expectations of 24.5% and 25.6%, respectively.
One firm (J.P. Morgan) reduced its FY10, FY11, and FY12 EBITDA estimates to $407.0 million, $443.3 million, and $459.9 million versus prior estimate of $427.8 million, $443.3 million, and $459.9 million, respectively, to account for an elongated LV Locals recovery and new competition in PA and NY that will negatively impact Borgata.
As per the Zacks Digest model, corporate G&A expense would decrease 16.1% y-o-y in FY09, but increase 2.6% y-o-y in FY10 and again decrease 2.0% y-o-y in FY11. In comparison, revenue is expected to decrease 6.8% y-o-y in FY09 but increase 1.7% y-o-y in FY10 and 4.3% y-o-y in FY11. Hence, EBITDA margin is expected to be 23.9% in FY09, 24.4% in FY10, and 24.2% in FY11.
As per the Zacks Digest model, depreciation and amortization would decrease 1.5% y-o-y in FY09, 0.6% y-o-y in FY10 and increase 1.1% in FY11, while revenue is expected to decrease 6.8% y-o-y in FY09 but increase 1.7% y-o-y in FY10 and 4.3% y-o-y in FY11. Hence, pro forma operating margin is expected to be 13.3% in FY09, and 13.7% in FY10.
Provided below is a summary of margins as compiled by Zacks Research Digest:
Margins / 3Q08A / 2008A / 3Q09A / 4Q09E / 2009E / 1Q10E / 2010E / 2011EEBITDA / 23.2% / 24.6% / 24.2% / 22.6%↓ / 23.9%↓ / 24.9% / 24.4%↓ / 24.2%↓
Operating / 13.1% / 14.3% / 13.1% / 11.6%↓ / 13.3%↓ / 13.0% / 13.7%↓
Pre-Tax / 5.7% / 7.4% / 5.2% / 2.6% / 4.4%↑ / 5.1%↑
Net / 3.3% / 4.6% / 2.0% / 0.8%↓ / 2.1%↑ / 3.3% / 2.4%↓ / 2.6%↓
Please refer to the Zacks Research Digest spreadsheet of BYD for more details on margin estimates.
Earnings per Share
In 3Q09, GAAP net income was $6.3 million, or $0.07 per share, versus $8.7 million, or $0.10 per share, in 3Q08 (in line with the Zacks Digest model). Certain pre-tax items resulted in a net increase in income of $1.3 million ($1.7 million, net of tax, or $0.02 per share) during 3Q09, including a $13.5 million noncash, pre-tax impairment charge related to joint venture with Morgans Hotel Group at Echelon, offset by a $14.4 million gain related to the share of an insurance settlement associated with the fire at the Water Club construction site in 2007.
Pro forma net income in 3Q09 was $8.0 million, or $0.09 per share, compared to $14.0 million, or $0.16 per share, in 3Q08. As per the Zacks Digest model, pro forma net income was $8.0 million in 3Q09 versus $14.1 million in 3Q08 (EPS was in line with the Zacks model).
Outlook
The Company did not provide any guidance. Many analysts feel the Company cited no guidance due to a lack of visibility.
One firm (Buckingham) increased its FY09 EPS estimate to $0.44 from $0.40, reflecting the 3Q09 upside and lower non operating cost assumptions. The firm also reduced its FY10 EPS estimate to $0.52 from $0.55, primarily reflecting more conservative estimates in the Las Vegas locals market.