Description

Thesis: BYD is a geographically diversified regional gaming operator, with a longstanding, stable and dependable management team.  Gaming stocks have broadly performed poorly YTD, due to recession concerns, deflation of the sports-betting “bubble”, and high balance sheet leverage across the group.  BYD is a “baby with the bathwater” situation, as (i) BYD’s operations have not shown any signs of cracking, (ii) sports-betting is an immaterial part of the BYD story, and (iii) its balance sheet leverage is historically low (at ~2.7x lease-adjusted net debt).

• Gaming trends have remained stable, despite broad economy recession concerns.  Against tough y/o/y compares, regional gaming spend is up +HSD% in 1H’22.  Historically, regional gaming has proven to be resilient during economic slowdowns.

• Unlike peers, BYD has committed minimal capital to sports betting initiatives, an industry which is currently highly unprofitable.  So, the deflation of multiples in this space (e.g., DKNG) should not impact BYD’s valuation. 

• BYD focused on cost-cutting and deleveraging in 2020-21, leaving it with structurally higher EBITDA margins and historically low balance sheet leverage.

• BYD is a "cash cow".  With low leverage and stable operations, management has committed its FCF to buying back stock with more conviction and consistency than ever before.  The company bought back the equivalent of 9% of its market cap (annualized) in 1Q’22 and subsequently increased its buyback authorization, implying continued aggressive buying in 2Q’22.

• Most Peers have sold their real estate to REITs such as VICI and GLPI, though BYD has opted against this.  Management prefers the operational flexibility and strategic optionality of owning its real estate.  Nevertheless, this real estate represents untapped value, worth 12-13x EBITDAR (vs BYD trading at 7x).  It also makes BYD an attractive PE target, should aging management elect to sell.

Valuation: BYD has historically traded between 7-10x EBITDAR.  Its current multiple is at the very low end of that range (7.0x), reflecting a 12% FCF Yield to the equity.  The shares are pricing in recession, which Sell-Side models as 10-15% downside to EBITDAR.  Such a scenario would increase BYD’s EBITDAR multiple to ~8x (still well below its historical average).  To better contextualize how inexpensive the stock is, current EBITDAR is up +50% vs 2019, but BYD’s EV has only increased by +20%. Even assuming flat EBITDAR growth and a modest re-rating to 8.5x, BYD has +50% upside.  A bull case assuming further multiple expansion to the higher end of BYD’s historical range (10x) implies +100% Upside.

Business: BYD operates ~30 wholly-owned casino properties in Nevada and 9 other US states.  Most of its properties are resorts/hotels that feature pools, full casinos, restaurants, shops, and on-site entertainment options for guests.  The company also has a partnership with digital gaming company FanDuel, where it uses their technology for its own online, mobile gambling, and sports betting services.   BYD does not own any Las Vegas Strip properties, with 1/3 of its revenues from LV Locals and Downtown and 2/3 from other regional markets.  Importantly, the business has proven resilient in economic downturns due to its loyal blayer base, and it should benefit in an inflationary environment - owing to its largely fixed cost structure and owned real estate.

DISCLAIMER:  DO NOT RELY ON THE INFORMATION SET FORTH IN THIS WRITE-UP AS THE BASIS UPON WHICH YOU MAKE AN INVESTMENT DECISION - PLEASE DO YOUR OWN WORK.  THE AUTHOR AND HIS FAMILY, FRIENDS, EMPLOYER, AND/OR FUNDS IN WHICH HE IS INVESTED MAY HOLD POSITIONS IN AND/OR TRADE, FROM TIME TO TIME, ANY OF THE SECURITIES MENTIONED IN THIS WRITE-UP.  THIS WRITE-UP DOES NOT PURPORT TO BE COMPLETE ON THE TOPICS ADDRESSED, AND THE AUTHOR TAKES NO RESPONSIBILITY TO UPDATE THIS WRITE-UP IN THE FUTURE.  

Catalyst

Valuation re-rating

FCF generation and share repo

PE take-private