Company Reports

We are dropping coverage of Boyd Gaming BYD to focus our resources elsewhere. Morningstar provides broad coverage of more than 1,700 companies across roughly 90 industry groups. We adjust our coverage as necessary based on client demand and investor interest.

Regional casino operator Boyd Gaming BYD reported weak third-quarter results that were slightly below our expectations. Revenue declined 0.9% to $590 million and EBITDA increased 6.8% to $114.2 million, with EBITDA margins improving 140 basis points to 19.4%. The increase in EBITDA and EBITDA margins was driven by cost cutting and operating efficiencies successfully implemented by management. The third-quarter results did not cause us to make any material changes to our financial model, and our fair value estimate for Boyd of $6 per share remains unchanged. We currently view Boyd as moderately overvalued, and we continue to recommend that long-term value investors avoid taking a long position in the stock due to Boyd's concentration of casinos in unattractive geographic markets. While management has excelled recently in increasing EBITDA through cost-cutting measures and operating inefficiencies, we think that absent renewed sales growth, increasing EBITDA through expense measures is not sustainable beyond the next two to three quarters.

Boyd Gaming BYD is an operator of regional casinos, with casinos in downtown Las Vegas and outlying parts of Las Vegas, Atlantic City, and other regional casinos in the South and Midwest. Boyd's casinos focus primarily on serving middle income consumers, with relatively low room rates used to draw in customers. Boyd has lagged other regional casino operators in sales growth, EBITDA margins, and ROICs in recent years. Boyd faces intensifying competition, particularly in the Atlantic City market. Boyd generates approximately a third of sales from the Las Vegas locals and downtown markets, which have been hit hard by a local housing market crash and high local unemployment. Boyd's uncertainty rating is very high, due to intensifying competition and the cyclical nature of the regional casino industry.

Boyd Gaming BYD reported weak second-quarter results that were slightly below our expectations. Net revenue decreased by 1% in the second quarter, with all of the company's operating segments performing poorly. Revenue for the company's Las Vegas locals casinos decreased by 1%, as the Las Vegas market continued to suffer from double-digit unemployment and a depressed housing market. Revenue at Midwest and South casinos was flat at $182 million, as Boyd's middle class and lower-income consumers in both regions continued to be constrained by high unemployment and high gas prices. The company's Borgata casino in Atlantic City continued its descent, with revenue declining 2% to $183 million, and adjusted EBITDA declining 10% to $39 million. The Atlantic City market has been devastated by increased competition from new casinos in states outside New Jersey, and we do not expect competitive pressures to abate anytime soon. Slot machines are expected to be introduced at the Aqueduct race track this year in New York City, a key feeder market for Atlantic City, and we expect Revel, a large casino in Atlantic City, to open next year and take significant market share from Borgata. The only operating segment that generated growth in the quarter was Boyd's downtown Las Vegas casinos, which generated revenue growth of 2.5%.

Boyd Gaming BYD announced that is acquiring the IP Casino Resort Spa in Biloxi, Miss., for $278 million. Management justified the acquisition under the rationale that it will diversify the company's geographic reach (management also indicated that it is seeking other acquisition targets). We view the acquisition as a poor move by Boyd management, as the Mississippi market is saturated and offers weak returns on invested capital, with more than a dozen casinos and the potential for more casino licenses to be issued in the state. In addition, Boyd, which has an overleveraged balance sheet (total debt/EBITDA at over 8 times), will use debt to finance the acquisition. We continue to think that there is risk that Boyd, in the event of the recession, will default on its debt obligations.

The Illinois Assembly passed a bill this week that, if signed into law by Gov. Pat Quinn, will authorize five new casinos in Illinois--including downtown Chicago and its south suburbs--and slot machines at Midway and O'Hare airports. A key difference between this bill and other states' bills passed into law in recent years is that the Chicago casino would be run by the city.

Boyd Gaming BYD is an operator of regional casinos, with casinos in downtown Las Vegas and outlying parts of Las Vegas, Atlantic City, and other regional casinos in the South and Midwest. Boyd's casinos focus primarily on serving middle income consumers, with relatively low room rates used to draw in customers. Boyd has lagged other regional casino operators in sales growth, EBITDA margins, and ROICs in recent years. Boyd faces intensifying competition, particularly in the Atlantic City market. Boyd generates approximately a third of sales from the Las Vegas locals and downtown markets, which have been hit hard by a local housing market crash and high local unemployment. Boyd's uncertainty rating is very high, due to intensifying competition and the cyclical nature of the regional casino industry. We view Boyd as slightly overvalued and think the market has already priced in a recovery in the regional casino industry.

Boyd Gaming Corp. BYD reported weak financial results for the first quarter ended March 31, 2011. Net revenue decreased 1.5% to $565 million compared to the quarter a year earlier, while adjusted EBITDA fell 4% to $112 million. Based on the firm’s poor performance during the quarter, our outlook that Boyd’s Las Vegas local casinos will experience a slow recovery, and the intense competition that negatively will impact the company’s 50% owned Borgata casino in Atlantic City, we are placing Boyd under review to adjust the assumptions in our financial model and to transfer analyst coverage.

Las Vegas Strip gaming revenue tumbled 9.6% in February, and Atlantic City gaming revenue fell 6.7% in March. While we were not surprised by the magnitude of the decline in Atlantic City, which has been on a downward trajectory for several years, we were slightly surprised by the steep decline in Las Vegas, which has now reported lower gaming revenue for four consecutive months.

Boyd Gaming Corp. BYD reported weak fourth-quarter and full-year results that were in line with our already low expectations. Revenue for the quarter was down 1.5% to $552 million, with adjusted EBITDA down 3% to $103 million. We are not making any material adjustments to our financial model based on fourth-quarter and full-year results, and we are maintaining our fair value estimate. We currently view the company as fairly valued.

Boyd gaming historically was a small-time casino operator, primarily known for its aging Stardust casino on the Las Vegas Strip and a bunch of smaller properties scattered across Nevada. However, the company has re-energized its property portfolio through a flurry of deals. Boyd partnered with MGM Resorts MGM in 2003 to build the splashy Borgata megaresort, which quickly became the dominant casino in Atlantic City. The company also became the number-two player in the attractive Las Vegas locals market with its acquisition of Coast Casinos in 2004. Finally, Boyd has expanded its presence in the Midwest through a series of purchases.

Boyd Gaming's BYD third-quarter results reflected moderating declines, indicating a slow improvement in its markets. We are leaving our fair value estimate unchanged.

Boyd gaming historically was a small-time casino operator, primarily known for its aging Stardust casino on the Las Vegas Strip and a bunch of smaller properties scattered across Nevada. However, the company has re-energized its property portfolio through a flurry of deals. Boyd partnered with MGM Resorts MGM in 2003 to build the splashy Borgata megaresort, which quickly became the dominant casino in Atlantic City. The company also became the number-two player in the attractive Las Vegas locals market with its acquisition of Coast Casinos in 2004. Finally, Boyd has expanded its presence in the Midwest through a series of purchases.

Boyd Gaming's BYD second-quarter results indicate that the gaming market will experience a slow recovery, and we are leaving our fair value estimate unchanged.

Boyd Gaming BYD has announced that it is no longer interested in the assets of casino operator Station Casinos. We are leaving our fair value estimate intact. Boyd had been interested in Station, which operates properties that cater to the Las Vegas locals market, for a year and a half as Station fell into financial trouble and eventually bankruptcy. The potential acquiree, however, rejected Boyd's offers and included provisions in the bidding process that placed outside suitors at a disadvantage relative to Station insiders, including a put option that forced external buyers to purchase currently leased land under properties, Station's ability to transfer items like customer lists and IT infrastructure, and the right to hire away employees before the sale. Although the acquisition would have bolstered Boyd's positioning in the Las Vegas locals segment, we view this as a positive sign that management will not make any acquisitions at too high a price. Additionally, the region continues to struggle in a tough economic environment, which probably has changed the return profile of the assets.

Morningstar is initiating credit coverage of Boyd Gaming BYD with a B- rating. Boyd Gaming wholly owns and operates 15 casino properties in five states. Nine properties are in the greater Las Vegas area, three are in Louisiana, and Mississippi, Illinois, and Indiana have one each. The company also owns a 50% interest in the Borgata, a $1 billion resort-casino in Atlantic City that opened in July 2003. Acquisitions include Coast Casinos, which added four properties in Las Vegas, and Harrah's Shreveport in Louisiana.

Boyd Gaming's BYD first-quarter results reflect continued improvement in the top line, and we are leaving our fair value estimate unchanged. Overall, the quarter was in line with our take that the gaming market would see signs of stabilization in 2010, and we expect to see improved results as the year progresses.

Boyd Gaming BYD reported fourth-quarter and full-year results that indicate signs of stabilization in the gaming market, but results remain generally weak. We are leaving our fair value estimate intact.

Boyd Gaming BYD has submitted a proposal to Station Casinos' board of directors, indicating its intent to acquire the firm out of bankruptcy for $2.45 billion in cash and assumed debt. Boyd has been interested in Station for some time now; its first offer in February totaled $950 million for a portion of Station's assets and was rejected. Adding Station to the portfolio would bolster Boyd's presence in the Las Vegas locals market, which has struggled amid the downturn as consumer spending tightened and the segment faced heavy pressure from aggressive discounting on the Strip. The company believes it can handle the acquisition using its existing credit facility. As of September, the firm had $2 billion of availability on its revolver. In our opinion, Boyd has one of the strongest balance sheets among casino operators, although this deal would increase its leverage and leave less breathing room. We are leaving our fair value estimate unchanged for now, but we continue to monitor the situation as events unfold.

We are leaving our fair value estimate for Boyd Gaming BYD intact after reviewing third-quarter results. Although we are placing a slightly lower expected value for the company's suspended Echelon site on the Las Vegas Strip, this had a minimal impact on our valuation. The company took a $13.5 million charge on the project and does not anticipate resuming construction for another three to five years, longer than we had originally forecasted.