Opportunity Knocks

Just because gaming revenues are flat doesn't mean you can't make money

Opportunity Knocks

The gaming industry continues to change in ways that are opening new opportunities for investors.

Daily fantasy sports. eSports. Skill-based gaming. Maybe virtual reality gaming. REITs. Social gaming. The continuing emergence globally of online gaming.

Interestingly, in the end, the biggest winners might be the good old brick-and-mortar casinos.

That is because casinos provide for the essential human experience—interacting live with other people.

Further, casinos, long vulnerable to legislative whims, now have become entrenched businesses in many states, meaning they have become a lobby with influence over the who’s and where’s of new forms of gaming.

Let’s look at these two strengths:

The Experience

The trend of casinos generating increasing revenues from non-gaming courses is not new.

But we have passed the point of a business decision to diversify revenues by charging for what was once widely comped—meals, shows, hotel rooms.

The rise of the mega-resort and, most recently, the uber nightclub, reveals something more profound—casino companies have become the masters of creating entertainment experiences.

And that plays right into the big trend of our times: people are placing ever-greater value on experience, and that is especially true for the much-discussed millennials, thus the uber nightclubs.

Or take eSports. There is a fascination with the emerging form of entertainment in which thousands of young people pack arenas to watch others play video games.

It gets to the heart of why casinos will continue to succeed—people can be as absorbed as they are by video games, but they are still people. They want to interact. They want to experience.

And casinos are a natural home for eSports, as we already see, whether with Downtown Grand in Las Vegas hosting weekly tournaments, or MGM Resorts intending to fill its arenas with tournaments.

Along the way, those thousands of eSports spectators will flood casino floors, sports books, poker rooms, table pits and night clubs, and stay on customer rolls as marketing targets.

Las Vegas Sands is offering another example of how the casino industry has become the experience industry.

LVS plans to build a 17,500-seat arena with Madison Square Garden Company that will the first ever designed solely for music and entertainment.

And, as with eSports, the clear expectation is that the thousands of concertgoers will spill out into the casino, nightclubs and swimming pools.

The advantages aren’t limited to destination resorts. Boyd is demonstrating what adding non-gaming amenities can do for the bottom line even in gambling-centric regional casinos.

The point is, social interaction is part of human nature, as is taking a chance. Only the casino industry provides both. And today, it’s the business model.

Strategic Moves

For a company that doesn’t have the glamor name like Wynn or Las Vegas Sands, Boyd Gaming sure has made some bold moves recently. And, we think, shrewd moves at that.

The big headline-grabber was selling its half of the Borgata in Atlantic City to joint-venture partner MGM Resorts for $900 million.

Two interesting points about what Boyd will immediately achieve:

1. It gets enough cash to pay down debt and bring its debt-to-EBITDA ratio to the company’s goal of below 4.5 times.

2. In effect, proceeds from the Borgata sale pay for Boyd’s purchases of Aliante, Cannery and East Side Cannery casinos in the Las Vegas locals market.

Boyd paid a combined $610 million for those casinos and expects to generate $62 million in EBITDA from them in their first full year, and then to grow.

There has been some question whether Boyd got too little for market-leading Borgata at 8.8 times EBITDA and whether it paid too much for the locals casinos at an average of 9.5 times EBITDA. BYD’s current stock price is around eight times.

However, judging a deal by those current EBITDA multiples is quibbling. The real question is the strategic value of the deals. In that regard, we think Boyd CEO Keith Smith has got it right.

Boyd is selling Borgata at its height. Atlantic City is going to continue to come under pressure as casinos arrive in New York, Cordish and Parx open another Philadelphia casino, and MGM opens its own National Harbor casino near Washington, D.C. And, of course, there’s a chance of two casinos coming to North Jersey, a prime AC market.

Then there is competition within Atlantic City. Caesars, under new CEO Mark Frissora, is showing a reinvigoration as an operating company and may well grow share in AC. Golden Nugget and Resorts have grown share under focused management. And Taj Mahal should reverse its decline now that its distractions have ended.

Then there are the Las Vegas purchases.

Smith called the purchases compelling opportunities, especially in rapidly growing North Las Vegas where Cannery and Aliante operate.

We agree.

Las Vegas is a Sun Belt city that will grow for a long time. Buying up locals casinos will give Boyd assets that it can grow commensurately.

Further, the purchases strengthen the value of Boyd’s B Connected players club and provide economies of scale that will drive down costs at what are now less cost-efficient, independent operations.

Combined with its properties in resurging Downtown Las Vegas, Boyd is buying cash cows at a fraction of the price to build them, or enter the Las Vegas Strip, in the nation’s third-fastest-growing metropolitan area.

The fact is that Boyd’s entire portfolio is strategically located throughout the country. And, while the company doesn’t have the glamor and glitz, it has steadiness that should reassure investors concerned with both preservation of capital and growth of capital.

This is a case where strategic vision should beat short-term financial metrics.

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