Vegas Stock Play: Long Boyd, Short Perini

Even assuming revenue and profits fall over this year and next, I can still get comfortable owning Boyd today.

Using conservative estimates on future earnings and the returns from the Echelon development, I feel the stock is worth $18, which implies about 30% upside from current levels.

When eyeing casino stocks, the preferred valuation metric used by the industry is enterprise value to EBITDA (earnings before interest, taxes, depreciation and amortization). This allows you to compare earnings across firms with different capital structures.

From 2001 to 2007, Boyd traded at an average EV/EBITDA multiple of 9.4, according to data from SNL Research. The low multiple was 6.8, back in 2001.

Today, Boyd is trading at 6.7 times estimated 2008 EBITDA, matching the trough multiple.

By placing haircuts on Wall Street earnings estimates over the next few years and also assuming Boyd earnings just a 10% return on Echelon, rather than the 12%-15% return that many analysts were originally projecting for the project, I think Boyd can earn $865 million of EBITDA in 2011 and at least $890 million of EBITDA in 2012.

Using a discounted cash flow model that assumes an 8x EBITDA multiple in 2012 and adjusts for the $3.3 billion to be spent by Boyd on Echelon, my analysis shows the stock is worth around $18.

One risk to the story remains the type of financing Boyd can achieve for Echelon. The company says it can fund the wholly owned portion ($3.3 billion) using its line of credit and other funds. Boyd hopes to attain financing by the end of the year for the additional $1.5 billion joint venture piece with Morgans Hotel Group (MHGC Quote - Cramer on MHGC - Stock Picks).

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