Tough Luck at Boyd Gaming

Updated from 5:01 p.m. EDT

Boyd Gaming ( BYD) posted second-quarter results Tuesday that missed analyst estimates amid tough competition in the Las Vegas casino market.

The company also announced the sale of its South Coast Casino, which has been a disappointment since it opened last year in Sin City.

For the second quarter, Boyd posted net income of $10.2 million, or 11 cents a share, down from $48.6 million, or 55 cents a share, a year earlier. The latest quarter's results included a $31.2 million pretax writedown related to the retirement of a gaming vessel, along with other items.

Excluding these items, Boyd recorded adjusted earnings of $42.5 million, or 47 cents a share, down from $50.3 million, or 56 cents a share, a year earlier. Analysts expected an adjusted profit of 58 cents a share, according to Thomson First Call.

Revenue increased 10% year over year to $610.9 million from $554.3 million, missing analysts' forecast of $626.6 million.

The company's Las Vegas casinos that cater to locals in the city had a 16% increase in revenue. That growth was primarily due to the addition South Coast, which was wasn't open a year ago.

Older properties posted disappointing declines. Boyd's Suncoast casino had an 11% drop in revenue, primarily due to increased competition from Station Casinos' ( STN) Red Rock Casino, which opened to packed crowds in April of this year.

Boyd said the overall Vegas results also were hurt by "continued softness" at South Coast. Part of the problem there has been the delayed opening of a new interchange that will access to the area. Analysts had said the property won't reach full potential until late 2007.

But Boyd announced it is now selling South Coast back to Michael Gaughan, the man who sold his Coast Casinos properties to Boyd in 2004.

"Investors may be surprised that Boyd is selling this property so early on given the expectations that the property should improve as it gets roadway access from the highway, and as the locals markets absorbs all the new capacity that's been added to the market over the six months," says Matthew Jacob, an analyst with Majestic Research.

Boyd said in its earnings release that South Coast will be sold for a purchase price equal to the proceeds from the sale of about 15.8 million Boyd shares that Gaughan owns. At least 75% of the purchase price will be paid to the company in cash.

The agreement also allows for Boyd to purchase up to 25% of Gaughan's shares, which amounts to 4.4% of the company's outstanding stock.

Cash proceeds will be used to pay down Boyd's revolving credit facility and to fund ongoing development plans. The deal should close by the end of the year, Boyd said.

On the conference call, Boyd's management provided little explanation about why it is selling South Coast, but did acknowledge the property has been disappointing.

"None of us can say that it met our expectations out of the box," management said. When Boyd purchased Coast Casinos from Gaughan, the South Coast development was already under construction.

The company also said the property was not shopped around to other buyers, but an investment bank did issue a fairness opinion on the price after Gaughan approached the company and indicated his interest in buying back the site.

In another sticky point for investors, management said it won't disclose the minimum purchase price on the sale until it files its 10-Q for the third quarter. The book value of the property is $575 million.

Boyd shares fell 3% to $35.40 in after-hours trading Tuesday.

If Gaughan's shares were sold at that price, the transaction would represent a non-cash loss of about $15.7 million for Boyd.

Results at the company's other casinos fared better than the Vegas local properties. In the central region of the country, revenue at Boyd's casinos increased 12% to $245.9 million. At the Borgata, the hip Atlantic City, N.J., casino that Boyd owns with MGM Mirage ( MGM), gaming revenue increased 1.9%. The growth came even as the Borgata operated with about 400 fewer slot machines due to an expansion at the casino. Non-gaming revenue increased 5.5%.

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