BYD: RETURN TO PEAK

Peak a long way off but no regional market has more upside than LV Locals.

I read some of the BYD sell side notes coming out of G2E and it appears most of the analysts are missing the boat.  The story does not remain negative same-store revenues in AC and the regional markets and still sluggish Las Vegas locals growth.  That was yesterday’s news.  Tomorrow’s story is a sequential improving top line in LV, leveraging a lower cost structure, cost cutting in the regionals, and stability.  The takeaway?  BYD should be beating estimates beginning in Q3.  Unfortunately, the sell side heard what they wanted to hear.  We think the buy side heard something new.

So how sustainable is BYD’s good fortune.  Well, for the moment, LV locals top line growth should be modest.  However, the macro – especially the most important variable of housing prices – is moving fast.  Remember that the LV housing market was among the hardest hit and in terms of casino revenues, no gaming market suffered more from the economic downturn than the LV Locals.  Psychologically, the rise of housing values above outstanding mortgages should provide a big lift to consumer confidence.  That lift could come fast and impact casino revenues quickly and dramatically.  One local economist we spoke to estimated that every 1% increase in housing prices generated $750 million to the Nevada economy.

We can’t predict when that will happen but we can give you some “return to peak” estimates.  BYD’s LV locals EBITDA is roughly half of where it was at the 2006 peak.  BYD only needs a 35% increase in revenues in that market to double its EBITDA there to get back to peak.  With a doubling of that EBITDA stream, BYD’s equity value would almost double as well.  We’re not projecting this as a near-term event.  However, we think the perspective is instructive and the magnitude unlike any other return to peak analysis with the exception of MGM.  But the sell side already loves that one.