November 21, 2021 - 11:42pm EST by
2021 2022
Price: 59.73 EPS 5 5.08
Shares Out. (in M): 112 P/E 12 12
Market Cap (in $M): 6,710 P/FCF 9.6 9.9
Net Debt (in $M): 2,808 EBIT 1,037 1,015
TEV (in $M): 9,519 TEV/EBIT 9.17 9.4

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I have written up Boyd (BYD) a few years ago, but think it is a good opportunity again.  BYD is a Regional Casino Operator with assets across the US with a high concentration in Las Vegas (both Locals and Downtown).  After suffering for years with a bad capital structure, BYD has massively deleveraged (leverage down to 2.6x) and continues to own the majority of its real estate.  The thesis for BYD now, is part industry related and part Company specific.


Industry Thesis:

There are tremendous tail winds in Gaming.  Due mostly to Covid, there is a lot of pent up demand.  So far, gaming revenue in 2021 has been record breaking with 3Q numbers are up 5%+ over 2019


1) While the the number of visitors has dropped, Spend Per Visit (SPV) has improved dramatically .  Interestingly enough, the visitors have mainly been newer/younger/first time gamblers.  Increased SPV, allows the operators to provide a high level of service with a less amount of help
2) Expecting the return of the classic/older gambler - this is where there is pent up demand.  These gamblers have been away and now with the vaccine and improved medicined to treat Covid, they are starting to come back
3) Return of the conventions / business.  This will certainly be slower paced than the past as companies have changed habits.  But the current environment has been operating successfully with almost no convention business.  This should be another huge boost in demand throughout 2022
4) Technology - additional of Online Sports Betting and iGaming has attracted gamers to companies brands.  Additionally, new products like digital and "cashless" allows younger people to transfer money easily, at the table without the need to pay huge fees at the ATM and makes the experience much better


Additionally,  Margins have really taken a step up and have caused a structural change in the industry:
1) It has been hard to hire people which has made operators figure out how to manage with less people.  "Employees" are the biggest cost for Casino's, so the lack of employees coupled with the large increase in SPV has allowed margins to increase dramatically.
2) Massive pull back in promotional allowances.  Competitive environment has been extremely healthy.  PENN and CZR especially are focused on reduced promo's and since they have such tremendous influence on the market, it should make for a much healthier competitive environment
3) While it is expected that margins will pull back in 2022, the majority of the margin gain is expected to be permanent 


Company Specific Thesis:

1) BYD has not spent money on Online Sports Betting or iGaming, but has 5% ownership stake in Fanduel, which is #1 in OSB and top 3 in iGaming.  It is expected that Fanduel will go public in 2022 and should be able to get a valuation higher than Fanduel, as they are the #1 brand and own better technology than Fanduel. A $10 billion Draftkings valuation would value BYD's stake at $500 million (or $4.5 per share).  Additionally, Fanduel has launched the Stardust Casino for BYD.  After their agreement with Fanduel runs out, BYD can operate the Stardust themselves.  So for very little investment, they will be able to have an immidiate online presence.  Finally, BYD operates in 10 states, which has given them the opportunity to "rent out" skins to other online operators that do not have a physical presence in the state.  While the numbers are small, this is a 100% margin for BYD

2)  BYD has massively delveraged and is now "gushing" cash flow.  While it has generated a lot of cash flow over the last few years, finally, BYD has the ability to use their cash strictly for shareholders instead of continuing to pay down debt.  BYD recently instituted a share buy back and wil be buying $300 million of stock in the open market. 

3) BYD still owns most of its Real Estate.  While, for the most part, BYD does not own prime real estate, the valuations for all Casino real estate has risen tremendously, especially with GLPI, VICI & Blackstone active buyers in the market.  Casino's comparable to BYD have been trading in the 12x+ EBITDA range, which is significantly higher than the 7.3x EBITDA where BYD trades.  

4) Las Vegas (33% of Revenues) is one of the fastest growing cities in the US 

5) Compelling valuation - BYD trading at under 10x FCF and at the lower end of its historical EV/EBITDA range

6) anectodal evidence of a strong 4Q, which should bring solid earnings and expectations of strong guidance for 2022

7) recent comments from an activist who has a position in BYD talking about the value of its real estate and the potential for a "go-private" transaction.  While, I do not think the probability of this is high, especially since BYD is such a conservative management team, it would be nice for others to help investors understand the hidden value within BYD.


Why does this opportunity exist?

1) expectations for gains in margin to dissipate, hurting 2022 numbers:  While BYD's top line is expected to grow next year, it is also expected that they will give back some of their margin gains, resulting in slightly lower EBITDA and Net Income.  However, I believe that EPS will increase because of the buybacks and that the margin loss will be minimal and will set BYD to grow both top and bottom line in 2023 and beyond
2) Gaming is cyclical and would be hurt in a recession
3) re-lapse of Covid:  While I don't think we are "out of the woods" with Covid, I think that the probability of a shutdown in the US is close to nil.  It just wont happen here again.  We are learning how to live with this disease





I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.


Earnings, buybacks & getting back to the Re-Opening trade

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