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Investors in casino stocks have gotten severely burned over the past year, as earnings multiples have fallen from historic highs and the economic downturn has ravaged profits.

After the whopping declines in the sector, it's worth sorting through the carnage to see if there are any good buys out there. The Bricks and Mortar mock portfolio already includes two casino stocks I feel are worth owning --

Melco PBL



Penn National

(PENN) - Get Report

, both of which, admittedly, have been disasters.

Nonetheless, I am a sucker for the casino sector. In the long run, the cash flows of casino owners remain somewhat steady, while also offering the potential for growth. At depressed multiples today, some steals exist, especially considering the asset value of irreplaceable casinos.

Today, I'm adding

Boyd Gaming

(BYD) - Get Report

to the mock portfolio as a stock to own. Shares of the casino owner have fallen more than 70% in the past year to around $13 today, as Las Vegas casino results have weakened and investors remain nervous about the returns on Boyd's massive Echelon Place, a development slated to open on the Vegas Strip in late 2010.

Buying beaten-down casino stocks can be a risky trade today. To hedge the Boyd position, I'm also recommending investors short


( PCR), the construction contractor for the Cosmopolitan Resort and Casino development in Las Vegas. Why? I believe the project has a meaningful risk of being cancelled, which would be a severe blow to revenue. But more on this later.

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) - Get Report


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.

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



Another risk is that Boyd's properties could come under even more severe distress than I project. I'm assuming EBITDA falls 14% this year and another 3% next year.

Nonetheless, with the stock trading at this depressed multiple, I'm willing to take the gamble that most of the negativity is priced into shares already -- even if there may be few near-term catalysts to move shares higher.

The Hedge: Short Perini

To hedge against owning Boyd, I recommend shorting Perini stock. The construction company is heavily reliant on commercial building, which represents about 80% of revenue.

The bulk of this commercial building is tied to resort and casino development. Perini is the contractor on the Cosmopolitan Resort and Casino, which is being built right next to the MGM City Center development on the Vegas Strip (where Perini is also the contractor).

Perini shares plunged earlier this year when the developer of the Cosmopolitan defaulted on his loan from

Deutsche Bank

(DB) - Get Report

, but shares have since erased some of those losses.

Deutsche Bank has since taken over the development and continues to fund the project -- at a cost of $70 million per month, according to a recent


report. Perini is getting paid for now but still had $1.2 billion of work remaining under the contract, as of March 31. Deutsche Bank declined to comment, and Perini did not return a call.

I believe there's significant risk that Deutsche Bank will simply stop funding the project this year if it is unable to find a white knight to come in and buy it. Banks remain under severe pressure to conserve capital today.

Deutsche Bank over the past month met with other major casino operators in Vegas to gauge the viability of the Cosmopolitan project, according to an industry source, and the verdict wasn't very encouraging.

If Deutsche Bank decides that every new dollar being sunk into the project is just another lost dollar, then Perini risks losing the rest of this contract, which would be a severe hit to its revenue, and its stock.