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Introduction

Boyd Gaming Corporation (BYD) is a $3.33 billion company in the casino and gaming industry. Market capitalization competitors in this industry include Penn National Gaming, International Game Technology, and Scientific Corporation. The casino and gaming industry is up 30.12% over the past year compared to the S&P 500, which is up 5.08% during the same period. Over the past month the industry has been down 7.66%, while the S&P 500 has been down 6.29%. Strong recent earnings from this industry helps contribute to strong potential for this industry grow. Specifically, Boyd's growth and valuation illustrate the potential for a strong earnings report next quarter.

Business

This section describes what Boyd does. According to Reuters, Boyd "is a gaming company that wholly owns and operates 16 casino facilities, which are located in eight gaming markets in five states in the United States." Boyd derives most of its revenue (74%) from its gaming operations. The company also operates in four specific areas: Las Vegas Locals, Downtown Las Vegas Properties, Central Region Properties, and Borgata.

Specific to the Las Vegas region, Boyd's local hotels and casinos include the Gold Coast, the Orleans hotel, and the Suncoast hotel. These hotels consist of amenities including restaurants, bars, fitness centers, movie theaters, and bowling allies. These properties are all located near the Las Vegas Strip. Moreover, Boyd, through its Hawaiian travel agency, tries to operate six charter flights from Hawaii to Las Vegas every week. The customers are able to enjoy the Las Vegas activities and stay at Boyd hotels.

The next region, central region properties, includes hotels and casinos built in the Midwest and South. Boyd's Sam's Town Hotel and Gambling is located in Mississippi and includes many of the amenities found at the Las Vegas locations. Moreover, Boyd has other gambling stations in Illinois, Indiana, and Texas. One of its most famous sites, however, is Borgota. Shared with rival MGM MIRAGE, Boyd "is responsible for the day-to-day operations of Borgata, including the operation and maintenance of the facility." This site also contains many of the exciting opportunities found in most all of Boyd's departments.

Growth

Boyd is doing fine growth wise. Over the past fiscal year, Boyd has seen sales rise to $2.19 billion. While this number is about 7.66% below the previous fiscal year, there is still a lot of optimism for Boyd. A five year sales growth average shows Boyd growing at 14.74%, which is respectable given the amount of revenue the company collects. In addition, this five year average is better than some market-cap competitors including International Gaming (8.69%). What is really impressive about Boyd, however, is the company's earnings. Over the past fiscal year Boyd reported earnings growing at 13.29%. This number is higher than the industry average at negative 12.67%, and the earnings figure is also higher than competitor Scientific Games (negative 19.21%). Therefore, while the past fiscal year has been a bit unusual for Boyd's growth, there is a huge potential for a future breakout year.

Returning to earnings, strong income means strong cost controls. In the past fiscal year, Boyd reported gross margins, operating margins, and net profit margins of 42.86%, 19.45%, and 7.14% respectively. These figures are all higher than the five year average respective margins of 81.69%, 11.21%, and 6.29%. Moreover, these figures are also higher than the industry's averages of 40.77%, 16.57%, and 6.14% respectively. And to further entice investors, Boyd's gross margins are higher than Penn National Gaming and Scientific Games. The company's operating margins are higher than Boyd's 9.86% margin, and Boyd's net profit margin is higher than Scientific's 5.63%. Strong revenue and great management control is a large reason why Boyd is an attractive purchase.

Moreover, when all these numbers are consolidated and referenced to the balance sheet, investors can realize Boyd's real potential. The company's ROE at 12.05% means that 12 cents is allocated to every dollar of shareholder equity. This is a great figure compared to market-cap competitors such as Scientific Games' 10.03% ROE. It is true that Boyd's figure is below the company's five year average this past fiscal year. However, most all companies in this sector dropped this year. Nevertheless, Boyd's 15% drop is not as dramatic as the industry's 23% drop.

Valuation

Boyd is undervalued. The current price to earnings ratio in the industry is 33.62. The current industry price to sales ratio is 7.12. Boyd has a forward 21.39 and a 1.67 multiple, respectively. Not only are these numbers below the company's trailing figures, but below competitors as well. The P/E ratio and price to sales ratio respectively for Penn Gaming (31.44 and 2.20), International Gaming (25.39 and 4.80), and Scientific Games (32.84 and 2.83) illustrate Boyd's undervalued status. Therefore, unless Boyd posts a severe negative surprise, there should be no reason why Boyd should continue to fall share price wise. This is especially true, since Boyd's PEG ratio at 1.46 is significantly lower than the three aforementioned market-cap competitors.

Efficiency

Boyd is very efficient. The company's receivable turnover of 76.54 is above the industry at 19.91. This means every 5 days, Boyd receives cash for selling goods. Asset turnover at 0.46 is also strong compared to the industry's average at 0.45. This number means that Boyd makes good use of buying and selling its assets to generate revenue. Moreover, Boyd's debt to equity ratio of 1.61 is also supportive of a growing company. Some investors may question too much risk equals liquidation problems, but no risk means no reward. And Boyd is capitalizing on its debt with higher earnings.

Moreover, Boyd provides a generous dividend yield. The company's 1.58% yield is higher than Penn National and Scientific Game's, both who offer no dividend. Institutional investors have recognized the benefits of Boyd's dividend yield and other fundamentals. Currently, institutions own 95.00% of all Boyd shares. Since the institutional investors have a larger gross amount of capital to lose compared to the retail investor, a high institutional percentage illustrates confidence in the stock's ability.

Technical Analysis

Boyd has performed fairly well share-price wise. In 2007 the company's share price is down 16.13%, which is not terrible given the bearish economic news the second half of the year and huge price fluctuations. The company was only up 1.13% in 2006, but had not experienced a negative calendar year since 2000 (a recession year) before 2006. Interestingly, since November 2001 up to November 2007, Boyd's share price is up 533% for an annual growth rate of 89%.

More specific to the current month, Boyd illustrates strong technical signals. The 50 day SMA and 50 day EMA are both flat, but static compared to other indicators. Parabolic SAR is above the current share price. Moreover, the company is a strongly undervalued compared to the RSI index at 35 and the fast stochastic at 16. Therefore, given the strong indicators, now may be the ideal time to purchase shares of Boyd.

Conclusion

Boyd is a great acquisition for any portfolio. The company's business model and fundamental analysis are both strong. It is very rare to find a company that has both strong valuation and growth, so it is wise to take advantage of these situations as they arise.

-Dennis Biray
November 16th, 2007