BofA Upgrades Boyd Gaming

Following the company’s impressive Q2 earnings report, Bank of America has upgraded U.S. regional casino operator Boyd Gaming Corp BYD from Underperform to Neutral. In a new report, analyst Shaun Kelley explains why the firm now sees stability returning to Boyd’s business.

Fundamental recovery
According to Kelley, Boyd’s 3.5 percent gross gaming revenue (GGR) growth in Q2, along with the company’s effective cost-cutting measures, was the driving force behind its Q2 EBITDA beat. Bank of America had predicted that Q2 would be a strong quarter for U.S. regional operators Boyd, Gaming and Leisure Properties Inc GLPI, Pinnacle Entertainment Inc PNK and Penn National Gaming Inc PENN, and so far the results have confirmed that prediction.

In addition to the company’s top-line growth, Kelley also points out Boyd’s 6.2x net debt/EBITDA ratio, financial leverage which can magnify equity returns.

Challenges
Despite the improving environment, Bank of America still sees challenges ahead for Boyd. The lack of intra-quarter property-level details from Boyd’s core markets of Las Vegas and Atlantic City makes those markets unpredictable and volatile. In addition, Boyd’s current valuation of 9.2x 2015 EBITDA leaves only limited room for upside for the stock.

Optionality
Boyd management has indicated that they have explored the possibility of both M&A and REIT conversion for the company.

“BYD is really the only logical acquirer of the other 50% stake in Borgata, and following MGM’s sale of Circus Circus Reno/Silver Legacy for ~7x LTM EBITDA, we think they could look to further opportunities to unload non-core assets,” Kelley explains.

Bank of America has a Buy rating on Penn and MGM Resorts International MGM.