Takeover speculation has been sweeping across the gaming sector after the world's largest casino operator, Harrah's Entertainment( HET), received a $15.1 billion leveraged buyout (LBO) bid Monday from a consortium of private investment firms, including Texas Pacific and Apollo Management.
One of the beneficiaries of the frenzied rally is
, which has gained 6% this week, closing Tuesday at $40.75 a share. Even so, shares of the company, which owns 18 U.S. casinos, including 50% of the upscale Borgata in Altantic City, are down 14.5% year to date.
With that in mind, I'm here to answer investors' questions: Should I do it? Is Boyd Gaming worth a gamble, or should readers fold and place their money elsewhere?
At current levels, the stock is valued at 17.1 times expected full-year earnings of $2.39 a share. This is a 17% discount to the price offered for Harrah's, but I believe Boyd deserves to trade at a lower valuation because of its 4% projected earnings decline in 2006.
Relatively, the company's larger competitors Harrah's,
Las Vegas Sands
, are on pace to deliver 7%, 14% and 16% profit growth this year, respectively.
To borrow some gaming parlance, a lot of Boyd's forward earnings power is "on the come," or based primarily on an uncertain future. Eleven of Boyd's locations are in Nevada, though management said last month it would close the nearly 40-year-old Stardust resort in Las Vegas to make room for its new Echelon Place, expected to open in 2010. The company also swapped the Barbary Coast casino Monday for 24 acres adjacent to the Echelon site, currently controlled by Harrah's.
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The company's other projects include a new tower at the Borgata, scheduled to open in late 2007. Boyd also plans to install slot machines at its Jai Alai location in Dania, Fla. Until then, 40% of the company's cash flow is coming from much smaller, aging casinos that lie off the main Vegas Strip.
I have to agree with Thomas Weisel analyst Jake Fuller, who said in a research note Monday that he does not "see Boyd as (a) likely LBO candidate." Citing the 37% ownership of the Boyd family and $4 billion of proposed expansion projects in the pipeline, levering up the balance sheet (a hefty 58% of assets are already covered with debt) with more borrowing for a purchase does not seem to gibe with the company's strategy.
With that in mind, I believe readers should pass on buying Boyd Gaming at current levels, as the shares could pull back toward the mid-$30s over the coming quarters. While the stock does trade at a discount to its peers, it is not likely a near-term takeover target, and year-over-year earnings growth should remain relatively low over the next 18 to 24 months.
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David Peltier is a research associate at TheStreet.com In keeping with TSC's editorial policy, he doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Peltier appreciates your feedback;
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