Vegas Stock Play: Long Boyd, Short Perini

The Case for Boyd

I was critical of Boyd last year, when the company refused to sell its Vegas land. At the time, Boyd could still grab about $30 million an acre for the land, but instead the company decided to take on more risk by building the $4.8 billion Echelon Place -- which is being called a "bet the company" project by institutional investors.

I still believe Echelon's returns on capital will disappoint, but at least the stock now properly reflects that risk.

Besides Echelon, Boyd currently owns attractive properties catering to the Las Vegas locals market, along with riverboat and land casinos in Illinois, Indiana, Mississippi and Louisiana. Boyd also jointly owns the popular high-end Borgata Casino in Atlantic City with MGM Mirage (MGM Quote - Cramer on MGM - Stock Picks).

To be sure, today none of Boyd's properties is performing very well. In the first quarter, Boyd's EBITDA margin fell to 27%, compared with 30% a year earlier. Even Boyd's share of the Borgata property income fell 13% to $19 million. The new Water Club hotel tower opened recently at the Borgata, which should add a nice stream of profits to the property this year but not enough to meaningfully move the valuation needle at Boyd.

Owning Boyd shares is a good bet today for two reasons. One is that the stock is trading at a trough earnings multiple that compares to that of the 2001 recession, when casino industry profits were hurt by the terrorist attacks of September 11.

The second reason to own the stock is that there is a good chance the economy will improve in 2010, just prior to the opening of Echelon Place.

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