LAND HO! LAND NO!

I wish I had a nickel for every time an investor brought up “hidden” assets as part of a long thesis on MGM MIRAGE. By hidden, of course, they mean land. I rarely see the same analysis for Boyd Gaming. Yet, BYD owns more developable land than MGM when viewed as a percent of enterprise value. As shown in the first chart, I calculate that the value of BYD’s land held for development comprises almost 20% of its enterprise value versus only 7% for MGM.
  • I’m certainly not advocating buying any stock for its land value right now. Land does have value that should be included in any valuation deep dive. The problem is that there is no market for land. I’m perfectly happy to argue that Las Vegas Strip acreage is worth $5 million or $10 million, but we don’t know until we actually see transactions at those levels. It is unlikely it’s worth $20 million per acre, as some analysts are still using in their target prices.
  • I’d put land value way down the last of why BYD looks interesting. More pertinent aspects of the thesis include liquidity, free cash flow, and the balance sheet. From a relative viewpoint, a land analysis is very instructive, however. Chart 2 compares BYD and MGM along 3 valuation metrics: EV/2009 EBITDA, (EV less land value)/EBITDA, and (EV less land and construction in progress)/EBITDA.
  • The beauty of this analysis is that it is relative and most of the land value for both BYD and MGM resides in Las Vegas (Strip and Locals). Any change in my assumptions for land value affects both companies. In these charts I value Strip land at $7.5m per acre, LV locals at $1m, and Atlantic City at $5m. I cannot defend these land valuations in a court of law. I only offer them up for comparison purposes.
  • The implications are clear. BYD is a much cheaper stock. You want to focus on land? Fine, BYD looks more attractive. Land is not important? OK. BYD looks more attractive.
MGM owns more developable land but BYD's is relatively more valuable
BYD is a lot cheaper no matter how you factor in land

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