Stay in This Game

Over the past few months, shareholders of Boyd Gaming (NYSE:BYD) must have felt like a blackjack player who is very content holding a 20 -- until noticing the rest of the players at the table have been dealt blackjacks. So far this year, shares of the nation's No. 3 casino operator have gained a respectable 11%, but the industry norm has been closer to 27%.

Investors cashing out
The gap widened a little further Wednesday morning, with the stock selling off sharply after the company released first-quarter results after the bell on Tuesday. Boyd reported widespread improvements across most of its properties, which helped revenues jump 14% to $646 million. Better still, the bulk of those additional revenues filtered down to the EBITDA line -- which climbed 26% compared with the first quarter of 2005.

As a result, adjusted earnings (including options expensing) rose 30% to $0.78 per share, topping expectations by a nickel. That's nothing new, because in four of the past five quarters, Boyd's quarterly earnings have beaten consensus estimates by double-digit percentages. In this case, though, the extra $0.05 on the bottom line netted shareholders about the same thing as the average nickel deposited in a slot machine: nothing.

Before exploring the reasons for the cool reception to numbers that were -- for the most part -- fairly solid, let's look at the region-by-region breakdown.

Three out of four's not bad
Aside from the Stardust -- a fixture on the Las Vegas Strip since 1958 -- each of Boyd's operating units posted stronger revenues and EBITDA. And few investors will lose sleep over a slowdown at the fading resort, which will be closing later this year to make room for Echelon Place -- a massive $4 billion project featuring four upscale hotels and acres of retail, dining, entertainment, and convention space.

Though not as flashy as the megaresorts lining Las Vegas Boulevard, Boyd's historic downtown properties delivered their best first quarter on record. The trio (the California, the Fremont, and Main Street Station) posted a sharp 23% increase in EBITDA, thanks in part to a steady stream of Hawaiian tourists who had booked trips through the company's own travel agency.

Meanwhile, in the Central region, which includes riverboat resorts from Indiana to Louisiana, margins expanded more than 700 basis points -- pushing earnings up by 50% to $84 million. The Treasure Chest in New Orleans was responsible for much of the increase, though that property is now facing heightened competition from industry leader Harrah's (NYSE:HET), whose downtown resort recently reopened.

This brings us to Boyd's locals resorts, the lifeblood of the company -- and, I suspect, the cause for much of Wednesday's disappointment.

Local residents are generally savvier than tourists when it comes to getting the most bang for their buck, demanding favorable odds, affordable dining, generous comps, and other amenities that are sometimes missing at high-end resorts. As a pioneer in targeting this unique niche, Boyd Gaming has cultivated a loyal base of players who typically live within a few blocks of their favorite casino -- unlike, say, Las Vegas Sands (NYSE:LVS), whose customers are usually forced to make travel arrangements to visit that firm's Las Vegas Venetian or Sands Macau resorts.

Boyd Gaming became a top-tier player in this fast-growing market segment two years ago, when it acquired Coast Casinos in a $1.3 billion transaction and today trails only rival Station Casinos (NYSE:STN) in catering to the booming population of Las Vegas and its suburbs. From the flagship Sam's Town in Boulder City to the newly added Coast family, Boyd's eight locals casinos represent roughly half of the company's revenues and property-level EBITDA.

Unfortunately, seven of those turned in a flat performance for the quarter, with virtually all of the gains coming from the new South Coast. Boyd's newest addition opened last December and is still partially under construction. Once complete, the $600 million resort will be ideally positioned to capture business from the teeming southern suburbs, as well as droves of Southern California players making the trip up Interstate 15.

After two years of expanding at a healthy clip, a slowdown in the locals market has many investors on edge. However, some moderation is to be expected, because a 26% spike in last year's first-quarter EBITDA made for challenging year-over-year comparisons. In any case, those caught up in Wednesday's numbers are missing the bigger picture.

A winning streak awaits
Clark County is one of the nation's fastest-growing metropolitan areas, with about 6,000 potential customers moving in every month. And with regulatory hurdles limiting off-Strip development to zoned regions, entrenched leaders like Boyd Gaming are well positioned to capitalize on the growing supply/demand imbalance. The company has an established presence in many of the area's key growth corridors, and with the recent acquisition of a 40-acre site on the north side of town, it's eyeing further expansion.

At the same time, Boyd is reaping tremendous rewards from its stake in the Borgata, a joint venture with MGM Mirage (NYSE:MGM). The resort has emerged as the clear-cut leader in Atlantic City and routinely generates the highest table and slot wins in the market. Despite having more than 10% of its slot machines offline in preparation for a $200 million expansion project, the Borgata still managed to lift its EBITDA by 15% to $65.3 million last quarter. Once the project is completed in June, the extra space has the potential to significantly boost revenues, considering the casino floor is operating at full capacity much of the time now.

Finally, the new Echelon Place is likely to be a major source of growth when it's up and running in a few years. Aside from more than 5,000 hotel rooms and a 140,000-square-foot casino (the third largest in Las Vegas), Echelon Place will offer visitors five-star dining, an upscale shopping promenade, an array of entertainment venues, and 1 million square feet of convention and meeting space.

The amenity-laden property will boost Boyd's competitive standing on the red-hot Strip, provide an opportunity to ramp up cross-marketing capabilities, and allow the firm to extract more non-gaming revenues from patrons. Adding a top Strip property to its locals entertainment, major presence in downtown Las Vegas and Atlantic City, and promising riverboat markets from the Great Lakes to the Gulf Coast will give Boyd the complement it needs.

Not too late to ante up
With Boyd's earnings advancing at a stellar 34% clip over the past three years, shares have rallied sharply, rising more than 56% annually over that time. Despite that run, Boyd is still trading at a sizable discount to its peer group. In fact, the stock is selling at just 11 times trailing cash flows, half of the average industry multiple of 22.

Furthermore, the shares are trading at just 18 times forward earnings, in line with the company's long-term projected growth rate, for a price-to-earnings-to-growth ratio of 1. By comparison, larger rivals Harrah's and MGM carry PEG ratios of 1.5 and 1.4, respectively.

Finally, it should be noted that the company recently decided to bump up its annual dividend payment by 8% to $0.54 per share. As management noted on a conference call, the dividend payout has increased 80% since it was first initiated two years ago.

Given the growth drivers in place and the ambitious development pipeline, the odds would seem to favor further dividend hikes -- and capital appreciation. At this point, I would keep my chips on the table.

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As you may have guessed, Fool contributor Nathan Slaughter holds shares of Boyd, but he owns none of the other companies mentioned. The Fool has a disclosure policy.