U.S. Markets closed

Why Boyd Gaming Has Turnaround Potential

- By Robert Stephens, CFA

Acquisitions have the potential to boost the financial performance of Boyd Gaming (BYD). The company has recently increased its presence across the U.S. through multiple acquisitions, with its size and scale set to drive incremental revenue.

Sports betting could provide the business with a growth catalyst. Deals signed with MGM (MGM) and FanDuel may allow it to develop a significant presence in what could be a rapidly growing industry. Although there is uncertainty in terms of the eventual size of the sports betting opportunity, the business seems to be well-placed to capitalize on it due to its range of locations across the U.S.


Having declined 5% in the last year versus a rise in the S&P 500 of 6%, the stock appears to have investment appeal.

1030609030.png

Acquisitions

Acquisitions could catalyze the financial performance of Boyd Gaming. The company has recently purchased four new properties following its acquisition of Valley Forge Casino Resort near Philadelphia. The transactions have provided exposure to three states in which it previously had no presence and four major metro areas. The company now has 29 properties in 10 states, with the most recent acquisitions expected to increase its free cash flow potential by $60 million per year.

It now intends to integrate the acquisitions into its business. In doing so it will leverage its size and scale in order to drive incremental growth. As well as offering access to a large pool of new customers, acquisitions across the U.S. will provide the company with the opportunity to drive new visitation to its destination properties in Las Vegas and the Gulf Coast. Acquisitions are also helping the company to become increasingly diversified and less risky from an investment perspective.

Sports betting

Increased geographic diversity may allow the company to capitalize on the opportunity in the sports betting market. Following the Supreme Court's decision to strike down a federal law prohibiting betting on sports, the company should be in a strong position to quickly grab market share as an increasing number of states formalize rules that permit betting on sports events.

The company has signed a deal with MGM to cross-market to each other's properties in order to provide online and offline gaming platforms. This provides a shared presence in 15 states. Given that Boyd Gaming has one of the largest sports books in Nevada, where sports betting has been legal for a number of years, it has the expertise and experience to quickly roll out a compelling offer to potential customers.

The sports betting industry is forecast to be worth up to $6 billion once it has been implemented across the country. The company's partnership with FanDuel could provide it with a competitive advantage versus industry peers through access to a significant interactive gaming infrastructure. The partnership will be able to quickly provide new interactive gaming offerings across the U.S.

Potential risk

While the sports betting industry could catalyze the company's growth rate in the long run, the profitability of industry operators may be relatively disappointing. There are likely to be a number of stakeholders in the sports industry who seek to capitalize on the sums being wagered. For example, sports leagues may be able to command a cut of profits. Whether sports betting becomes a lucrative business could depend on the various rules put in place in each state, which may mean that the total size of the market is less than previously envisaged.

Boyd Gaming, though, is seeking to improve its competitive position in the wider gaming market through a loyalty program. It recently relaunched its Be Connected loyalty program with enhanced benefits as it seeks to increase its appeal to core customers and generate improved levels of repeat business. It is set to expand its loyalty program to include all of the properties in its nationwide portfolio, as well as integrating it into new gaming products including sports betting and interactive gaming.

Outlook

Recent acquisitions could catalyze the company's financial performance. Its size and scale may mean that they are able to deliver incremental sales growth. The sports betting market may present a growth opportunity, with the company's wide range of locations and recent deals providing it with the chance to capitalize on what could be a $6 billion industry.

Although there is uncertainty about the potential profitability of the sports gaming market, the company's loyalty program may provide it with a competitive advantage. Having underperformed the S&P 500 in the last year, the stock could deliver a successful recovery.

Read more here:

A Look at Tepper's Bigger Stakes in Casino Stocks

Balancing Humility and Arrogance

This article first appeared on GuruFocus.