This Gaming Company Looks Overvalued

Motley Fool

When you think of places you might want to visit to gamble, it's highly unlikely that you conjure up images of Illinois, Indiana, Iowa, Louisiana, and Missouri. However, that's part of the strategy for Boyd Gaming (BYD) .

Geographic diversification
By establishing presences in these underserved markets, Boyd Gaming has an opportunity to grow its brand in new markets. Boyd Gaming is already established in Las Vegas and Atlantic City with its most notable property being the Borgata Hotel & Casino in Atlantic City.

Boyd Gaming's strategy would make a lot of sense in a normal economic environment, when consumers are more likely to part with their cash, but that's not the world we're living in today. And due to Boyd Gaming's high debt levels, the company's potential to grow the top and bottom lines simultaneously is limited.

Company concerns
Boyd Gaming has seen reduced spending, especially from its casual players. Boyd Gaming has attributed this trend to higher payroll taxes and concerns that customers have over future employment opportunities and wages. You can also throw in high gas prices as a potential headwind.

In the second quarter, Boyd Gaming's net revenue came in at $738.7 million, higher than the $614.1 million seen in the year-ago quarter. However, the acquisition of Peninsula Gaming in November of 2012 increased revenue by $135.8 million. Therefore, it you took away that acquisition, net revenue came in lower than the year-ago quarter at $602.9 million. On a "comps" basis, demand has been fading.

Boyd Gaming acquired Peninsula Gaming for $1.45 billion, further adding to its long-term debt, which now totals $4.57 billion, versus just $183.01 million in cash and short-term equivalents. Boyd Gaming wanted this property for its Iowa/Kansas exposure, but it certainly came at a cost, as Boyd Gaming now sports a lofty debt-to-equity ratio of 8.69.

Boyd Gaming has attempted to reduce its debt via sales of Dania Jai-Alai and Echelon, but these led to just a pre-tax gain of $18.9 million and $157 million in net proceeds, respectively. These transactions help, but they're not going to make a significant impact. However, every little bit helps, and it should be noted that the Echelon sale will save Boyd Gaming $16 million-$17 million per year.

One last note on revenue is that the Midwest & South region saw net revenue plummet 4% year over year, while Atlantic City revenue dropped 1.4%. The one bright note here is that the Borgata is still the slot handle and table game drop leader in Atlantic City. In other words, people gamble more there than nearby casinos.

Different types of gambling operations
Boyd Gaming isn't the only casino resort option in the space. For instance, if you want to bet on a company with a lot of Las Vegas exposure, then you can invest in MGM Resorts International (MGM); If you want to bet on luxury and the high-end consumer, then you can invest in Wynn Resorts (WYNN); and if you want to bet on a company with a lot of Macau exposure, then you can do so through Las Vegas Sands (LVS) .

For a quick picture of how these companies have been performing on the top line over the past several years, consider the chart below:

BYD Revenue TTM data by YCharts

Now take a look at the bottom line:

BYD EPS Diluted TTM data by YCharts

After looking at those charts, it should come as no surprise that Las Vegas Sands and Wynn have outperformed its peers over a five-year time frame:

LVS data by YCharts

On top of this, Boyd Gaming and MGM Resorts International don't measure up well against its peers when it comes to some key metrics:

Metric

Forward P/E

Net Margin

ROE

Dividend Yield

Debt-to-Equity Ratio

Short Position

Boyd Gaming

59

(33.56%)

(99%)

None

8.69

19%

MGM Resorts International

120

(16.53%)

(16.53%)

None

1.67

4.50%

Wynn Resorts

21

10.50%

205.90%

None

33.86

7.70%

Las Vegas Sands

19

15.30%

24.99%

2.10%

1.06

2.10%

Since Boyd Gaming and MGM Resorts International aren't good at turning revenue and investor dollars into profit, there would be little sense paying up for them when Wynn Resorts and Las Vegas Sands offer positive net margin and ROE and trade at 21 times and 19 times forward earnings, respectively.

If you break it down from there, Las Vegas Sands pays a dividend while also displaying the best debt management. I recently wrote an article about how I wouldn't bet on Las Vegas Sands at this point in time. However, this was mostly due to external economic conditions, not management, and if you're going to bet on this industry, it's likely to be your best bet.

The Foolish bottom line
Boyd Gaming implements a logical strategy by establishing presences in underserved markets. It has also done a superb job with the Borgata from a brand perspective. But with most consumers cutting their spending, this doesn't seem to be the best time to invest in a casino resort. If you choose to do so, with the intention of buying more shares on dips (perhaps large dips), then at least consider going with the best option in this group, that is Las Vegas Sands.

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