Stakes Get Higher for Boyd Gaming

Boyd also has been dealing with a slow ramp-up of its new South Coast casino property, located just minutes outside the southern end of the Las Vegas strip. The property won't reach its full potential until the Interstate 15 interchange is constructed in late 2007, Lerner says.

The Borgata, which is widely viewed as Atlantic City's hippest casino, has seen a temporary disruption lately due to a $525 million expansion. The first part of the plan will be finished this weekend, bringing in an additional 500 slots, 36 table games, a new 85-table poker room, and three fancy restaurants. But because 10% of the gaming devices were shut down for the construction, the Borgata's second-quarter results likely will be hampered.

Adding all these factors together, investors are expecting a messy second quarter. That, in turn, has dragged down Boyd's stock. Following other analysts, Lerner recently cut his second-quarter EPS estimate for the company by 4 cents due to the plethora of short-term concerns.

"Near term, we believe it's going to be tough for Boyd to have a substantive rally until its earnings call, outside of a gaming-wide rally," says Steven Gart, an analyst with Nickel Capital, a hedge fund that invests in the gaming sector, but doesn't own Boyd.

"Now if it turns out that the analysts have been too aggressive on their estimate reductions, the stock may indeed see a relief rally headed into the quarter," Gart says. "That being said, management tone and how they answer the Red Rock competition question will also, in our opinion, weigh greatly on the shares."

At around $40, Boyd's enterprise value is trading at 7.3 times Wall Street analysts' estimates for 2007 earnings before interest, taxes, depreciation and amortization. In comparison, MGM is trading at nine times estimates, Station Casinos is trading at 9.8, and Harrah's (HET Quote - Cramer on HET - Stock Picks) trades at 8.4 times.

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