Boyd Gaming (BYD) — A Winning Bet for Long-Term Investors?
Casinos are great businesses that can generate high returns on capital (ROC) with high cash flows. We have the opportunity to buy Boyd Gaming (BYD) a well run casino owner and operator at an attractive price of 7.5x P/FCF and 7.5x EV/EBIT. Management are conservative operators and good capital allocators. We believe, in the long term Boyd will provide investors with a superior investment return.
Casinos are great business and Boyd is no exception, Boyd has a ROC >40%. Historically, casinos have been able to generate high returns on capital with real estate/utility-like cash flows. The notable exception being the COVID-19 pandemic and the Great Financial Crisis which significantly stressed casinos.
Boyd owns and operates 28 casinos across the US. They own and operate Boyd Interactive, an online casino gaming business in the US and Canada. They also have a strategic partnership with and are a 5% equity owner of FanDuel Group, one of the largest sports-betting operators. Notably, they do not own or operate any casinos on the Las Vegas strip. Boyd groups their properties into four operating segments:
Las Vegas Locals
Downtown Las Vegas
Midwest & South
Online
Boyd generates revenues across 5 categories with their casino gaming generating the majority of revenues:
Casino Gaming — 70%
Online — 11%
Food and Beverage — 8%
Hotel — 5%
Product And Services — 4%
Management Service — 2%
Boyd is a well run company and has increased revenue and profitability over the years through acquisition, investments, partnerships, and efficient operations. Management at Boyd have operated conservatively and have deployed capital prudently in our opinion. They have not incinerated cash in the sports betting industry like other peers, rather they have partnered and have taken an equity position with FanDuel. Over the last few years Boyd has also bought back over 17% of their shares and continues to do so while also paying a modest dividend.
Revenue and profitability (margins) has steadily increased over the years across revenue categories. For example, food and beverage are run at a profit now and casino profits (margins) have increased significantly. One risk is if this trend reverses, the fixed cost and debt of a casino will be a headwind on an investor's return. This could happen from online gaming cannibalizing casino revenues or reignited competition from requiring decreased profitability (e.g. more comps required to retain clients). In our opinion online gaming is a growing category complementary to casinos. In any case neither of these risks have materialized. Another consideration is that the Boyd family still owns approximately 28% of the shares outstanding.
Boyd owns most of their real estate and as such have a low capitalized net debt load. Overall net debt is also at a reasonable level of 2.6x Net Debt/EBIT. Other peers have higher levels of debt and many of them have sold their real estate to varying degrees greatly increasing implied leverages. It is our opinion that over the long term, owning real estate will provide greater long term business resilience and flexibility. While selling and leasing back the real estate can provide a large one time injection of cash, the ongoing rent expenses now incurred increases the overall leverage and risk of the business. During financially stressful times (e.g. COVID-19 or Great Financial Crisis) FCF can rapidly evaporate and create liquidity and solvency issues. We think it is a better strategic and long term move to own the real estate your casino properties operate on.
Nearly the entire gaming industry is cheap on an absolute basis (e.g. CZR and recently acquired BALY). However, we prefer Boyd for their conservative operation, prudent capital allocation, and conservative overall strategy. Optically, Boyd is more expensive than peers but they carry less debt and own more of their real estate.
We can buy Boyd at 8.5x P/FCF and 8.5x EV/EBIT and the business should grow MSD with a significant amount of FCF being returned via dividends and share buybacks. But, Boyd also owns 5% of Fanduel. We roughly estimate FanDuel to be worth $20B, Boyd’s stake being worth $1B. Ex-FanDuel the metrics are 7.5x P/FCF and 7.5x EV/EBIT.
We have the opportunity to buy a well run company that owns a collection of casinos and FanDuel stake at an attractive price. Management are conservative operators and good capital allocators. We believe in the long term Boyd will provide investors with a superior investment return.
ColdBerry Capital is a global value investment fund whose investment philosophy is inspired by Warren Buffett and Charlie Munger. To find out more you can contact us here.
Notes
Price of Boyd Gaming (BYD) as of writing this article is $64/share
Financials were taken from Boyd’s 2023 10k
Most recent share count was taken from Boyd’s Q3 press release
Disclaimer
The thesis expressed above contains forward-looking statements and is intended for informational purposes; it is not a recommendation to buy, sell, hold, or otherwise trade the securities of the referenced issuer. The authors/their affiliates do not hold a position with the issuer such as employment, directorship, or consultancy. The authors/their affiliates currently own a position in the referenced issuer's securities; however, that position may change at any time and without notice.
