State revenues from March are still coming out and they’re ugly as expected. Beyond these numbers, BYD seems to have a few positive catalysts.
CALL TO ACTION
Up to 4 significant refinancing transactions and potentially better (than whisper) near term property level performance could lead to BYD stock outperformance in 2014. We’re still worried about the rest of the weak March numbers coming out from the states as well as more negative earnings revisions from other analysts. However, we would view weakness as an entry point.
We’ve been worried about the March performance of the regional markets for a while now and regional results are certainly coming in ugly. While downside to Q1 consensus estimates appears likely for PENN and PNK, BYD could be fine for Q1. Recall, Boyd didn’t provide Q1 guidance until March 5th and the sell side may not be taking into account the contribution of the apparently successful Penny Lane slot initiative and potential margin improvement. We’re not sold that management has found religion in terms of overhauling its operations but there are still some low hanging fruit (already eaten by the competition) that could boost near term performance.
Beyond Q1, our more positive view on the stock is bolstered by four significant debt refinancing transactions we expect to occur over the next four to eighteen months. Over this time period, Boyd should be able to call and refinance $1.4 billion of debt carrying a blended interest rate of 9%. The debt should be refinanced at significantly lower interest rates, which in turn will result in lower interest expense and ultimately positive fully taxed earnings per share accretion of $0.12 to $0.17 (assuming a blended rate of 7.5% to 7.0%). Realistically, with NOLs of $1.1 billion, the EPS and FCF/shr accretion will be in the range of $0.19 to $0.25. For reference, our 2015 calendar year EPS estimate is $0.42.
BYD management could begin to discuss the refinancing strategy as soon as the 1Q14 earnings call which we expect to occur in early May. There are significant fact parallels between Boyd’s upcoming refinancings and MGM’s refinance activities during 2011 and 2012 which helped boost that stock.
INVESTORS FADING THE REIT
The REIT chatter has died down and that’s probably a good thing. However, BYD management still faces numerous options to unlocking shareholder value through real estate transactions. A full REIT spin is possible but not probable and may not be imminent. As we outlined in our 03/14/14 presentation and conference call, the hurdles are significant but not insurmountable. Management seems more open to asset sales. For us, the highest value could be achieved through a sale to GLPI: GLPI should be willing to pay a high multiple and diversify its tenant base and BYD could retain ownership of the operations. Stay tuned here.
The activist pop also seems to have waned. We’re only a month removed and 3% off the close (and 2 UCONN Husky basketball championships) before Elliot Capital’s position was made public. Elliot’s ability to influence management both publicly and privately could be limited unless they obtain gaming licenses in BYD’s jurisdiction. However, subtle pressure can work as well.
THE END GAME
A full operations overhaul would be value creation option #1 in opinion. Unfortunately, option #1 is not imminent. However, some improvements seem to have been made and forward numbers may not be as bad as feared as a result. Upcoming refinancings should juice EPS and FCF/shr later in the year and in 2015 and could catalyze the stock. And who knows, maybe BYD could even play a few real estate cards.