• It's Coming...

    MARKET EDGES

    Identify global risks and opportunities with essential macro intel using Hedgeye’s Market Edges.

Pay no mind to EPS - top of the EBITDA guidance range isn’t bad. Non-recurring online costs, high income taxes, and a comp expense adjustment prevented a beat. Borgata looking much better for Q2.

CALL TO ACTION

We like the setup here for BYD, assuming the economy behaves.  Q1 would’ve been much better, if not for some non-recurring items.  Instead, the stock is indicating down based on a headline EPS miss.  Despite the items, EBITDA still fell at the high end of company guidance and in line with consensus.  The upcoming catalysts look favorable: 

  • a much better April at the Borgata
  • potential breakeven operations as soon as April for online
  • compensation expense normalizing
  • much easier comps
  • a potentially very material property tax rebate in Atlantic City
  • a lower go forward property tax rate that could add $15-20 million annually to Borgata EBITDA – 13-17% boost to our current Borgata estimate
  • a series of potential debt refinancings beginning in August that could generate $0.15-0.20 in incremental EPS 

Q1: HEADLINE EPS MISS BUT EBITDA AT THE TOP END OF GUIDANCE

The headlines read that BYD missed on EPS.  However, Q1 EBITDA of $144.5 million was in line with consensus and at the high end of management’s guidance of $140-145 million.  Moreover, bad weather impacted the quarter by $2m more than guidance, Borgata online suffered a loss of $3m of which $2m was due to non-recurring start-up costs, a stock compensation adjustment hurt pre-tax income by another $2m, and income taxes were unusually high.  The first two items hit EBITDA while the remaining were below the EBITDA line.  Q1 was a solid quarter relative to expectations.

By region, we suspect BYD posted better results everywhere with the exception of Borgata due in part to the online losses but also very bad weather which seemed to impact the hotel and F&B more than gaming.  Good cost controls helped the LV Locals business post YoY EBITDA growth but the lack of revenue growth remains frustrating.

GOING FORWARD

2014 EBITDA guidance of $600-620 million bracketed the consensus EBITDA projection of $610 million.  Management forward commentary was similar to the PENN and PNK conference calls that April was soft.  We would note that our research indicates that April will be much better than Q1 and March in terms of YoY growth and we are projecting accelerating trends for May and June.  Borgata, in particular, looks much better both on land and in cyber space.  We should be getting New Jersey’s April gaming revenues on May 14 and we suspect Borgata did well.  Borgata’s online operations – a major drag on Q1 – could move into the black sometime in Q2.

Comps look very easy for the back half of 2014 and BYD should post solid growth.  Upside to guidance could come from top line growth in Las Vegas and more cost cutting in other markets.  The big prize will be a favorable resolution to the property tax dispute in Atlantic City.  We don’t think investors have focused on how important this development could be for BYD.  Here is the rundown:

  • In July, a judge will hear the city’s appeal of a favorable court ruling for BYD that awarded the company $54m in rebates and interest for 2009/2010. 
  • In September, a judge will hear for the first time, BYD’s contention that they are due a similar rebate for 2010-2012 totaling $75m.
  • Prospectively, BYD is negotiating all along similar lines for lower property taxes that could result in $15-20m annually in incremental EBITDA for Borgata.
  • Combined, these property tax adjustments would generate $1.75 to $2.00 per share in value to BYD stockholders.

CONCLUSION

Headline EPS be damned, Q1 and guidance were solid.  Positive catalysts are out there.  Overall, there is a lot of value in BYD, particularly if the company can continue to make operational changes to improve its underperforming margins or pursue any real estate related transactions.