The market didn't react well to Boyd Gaming Corporation's (NYSE: BYD) earnings report last week, sending shares nearly 20% lower since the report came out. Revenue and earnings growth have slowed in the regional gaming market, and investors are worried an overall slowdown is around the corner.
Boyd Gaming also has a lot of leverage at a time when top-line growth is getting harder to come by. There's both good and bad in the earnings report and a lot for investors to consider for regional gaming stocks.
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Boyd Gaming's revenue figures are showing the tepid operating environment but growth nonetheless. Overall, revenue was up 3.5%, which included a small contribution from the Valley Forge Casino Resort, acquired in September. The Las Vegas locals segment's revenue was down slightly to $208.8 million, and downtown Las Vegas revenue was up slightly to $59.2 million. Most of the growth came in Midwestern and Southern regions, which were up 6.5% to $612.2 million.
What management wants investors to focus on is rising adjusted EBITDA, a measure of cash flow, from the business. Las Vegas locals EBITDA was up 6.6% to $60.0 million, and Midwestern and Southern EBITDA jumped 8.5% to $97.8 million. Overall, EBITDA rose 5.8% to $148.8 million.
Growth is mixed on the top line, but Boyd Gaming is squeezing more out of its resorts than a year ago. What's most concerning is Las Vegas, the heart of the U.S. gaming market, where there are signs that the days of solid growth may be coming to an end.
One of Boyd Gaming's most exciting partnerships in recent years is a deal with FanDuel and MGM Resorts International (NYSE: MGM). FanDuel will help bring digital sports betting to the market using Boyd Gaming's physical presence and gaming license. An agreement with MGM will ultimately allow Boyd to access 15 states that represent 36% of the U.S. population.
Sports betting could be a multibillion-dollar business if it's opened up across the country, and Boyd's wide gaming footprint could give the company a unique opportunity to capitalize on the trend. But only a few states are open to digital sports betting today, so how big the market will be and when Boyd will be able to capitalize on it fully is unknown at this point.
Debt is worth watching
What I would keep an eye on closely at Boyd Gaming is debt. The company now has $3.60 billion of debt, offset by $441.0 million in cash on hand. Compared to the $660 million to $675 million of EBITDA expected this quarter, a net debt to EBITDA ratio of 4.7 times is at the top end of the range.
That's not a high leverage ratio compared to previous levels for Boyd, but if growth is stalling in Las Vegas and that spreads around the country, it's easy to see how the company could become extremely highly leveraged very quickly if those bottom-line figures deteriorate. Rather than buying back stock, I think Boyd would be better served paying down debt to reduce future risk. After all, it was debt that put gaming companies in a lot of trouble during the last recession, something that could easily happen again.
Not the safest bet in gaming
Boyd's regional gaming markets are never going to wow investors, but they should grow steadily against a strong economic backdrop. The fact that they aren't is what has investors concerned today. I think the market's reaction was overdone given the solid EBITDA numbers last quarter, but investors should watch growth and debt levels going forward for signs that the economy could become a headwind rather than a tailwind for gaming stocks.
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