Gaming stocks are rolling. The opening of the credit markets suggest they may continue to roll. We've fielded a lot of questions lately on Boyd Gaming and why this stock has outperformed. Sure we've gotten the calls on LVS and MGM, which have actually done better than BYD since the March lows. Those stocks were essentially stock options back in March so the fact that they have outperformed is not surprising.
The BYD analysis is instructive because there were a lot of misunderstood and moving parts and, more importantly, more oil left in those parts to keep this engine humming. Here were and are the drivers in order of importance:
- Unsustainably high FCF yield - On our numbers BYD traded at a free cash flow yield approaching 50%, in part due to number 2 below. BYD still has upside to over $16 to reach a 15% FCF yield and quantitatively/technically can go to $18 pretty easily per our Quant/Macro guru Keith McCullough.
- Understanding BYD's "misunderstood" financial leverage - Their credit situation is an asset not a liability. We tried our best to focus investors on the details behind BYD's seemingly high leverage of 6x. The market is beginning to understand that with $2 billion of availability on the credit facility, an incremental borrowing rate of just 2% above LIBOR, and an insignificant amount of Capex, BYD is in great shape financially. The only potentially derailing factor would be a covenant breach but the company has enough levers to get through 2009 to 2010 when the maximum leverage covenant actually steps up. It is not fully reflected in the stock price yet but BYD has a phenomenal asset in its credit facility that doesn't mature until 2013. By that time, BYD could be only 3-3.5x levered.
- Opening of the credit markets - I don't want to totally re-hash our 5/1 note, "CREDIT MARKETS OPEN FOR BUSINESS", but suffice it to say, the opening of the credit markets allows the companies to improve their liquidity position and shore up their balance sheet. Multiples expanded because they should. FCF is more believable and the bankruptcy discount is fading.
- Cost cutting - Every gaming company that has reported Q1 earnings has shown significant evidence of meaningful and sustainable cost cuts. BYD should do the same.
- The rotting of the "LV Locals is a tough market" thesis - The LV locals is in for a tough 2009. Yeah, we get it. So does everyone else. Let's talk about 2010 and how there is still population growth, and new projects are boosting employment. Housing is affordable and retirees still want to come to Las Vegas, and so do people who don't like paying taxes.
- Strong regional Q1 EPS - PENN, PNK, and ASCA all blew out earnings. The regional markets have stabilized and some are even showing growth. BYD is a regional gaming operator with exposure to some attractive markets. I'm not necessarily making a Q1 earnings call on BYD, although I do think the margins will look impressive.
- Takeout rumors - I'm throwing this one in there because the rumors are out there. I don't have any insider information but I don't need it to see that the FCF yield is 25%, despite the run, which leaves significant upside to a target yield of 15%.