I'm glad we're shaking things up a bit from our typical bull/bear duel, because I don't really have anything negative to say about my colleague Jeff Hwang's pick, Station Casinos
In fact, many of the same things that make my choice, Boyd Gaming
Nevertheless, in an industry that is defined by odds, I still believe that the numbers stack up clearly in Boyd's favor -- and I've been given 1,000 words to tell you why.
A rising tide ...
Most are aware that these two slug it in the lucrative Las Vegas locals gaming market, which generally caters to area residents seeking an affordable mix of gaming and entertainment options away from the hustle and bustle of the strip.
Boyd actually helped create this $2.5 billion subsegment 30 years ago, with the opening of its flagship Sam's Town resort, and it strengthened its position several years ago by joining forces with the profitable Coast casino group.
In the most recent Casino Player magazine "Best of Gaming" survey, Sam's Town walked away with 25 first-place awards, including best promotions, best hotel rooms, and the coveted title of best overall hotel casino. Meanwhile, its sister Orleans property got high marks from poker players and outpolled all others -- including the trendy Palms and Hard Rock casinos -- in terms of overall entertainment.
Despite such accolades, I'm not going to make the argument that Boyd is better positioned than Station in the Las Vegas locals market. Just to be clear, I'm not readily conceding the point, either. But I am stating that it isn't central to the discussion.
I think that Jeff will agree with me that the long-term fundamentals underpinning the growth of the locals market remain highly attractive and that both companies stand to benefit greatly as the market expands over time.
However, with no properties outside the Las Vegas metro area, the story ends there for Station -- but it's just beginning for Boyd.
Spreading its wings
As of last quarter, locals generated only about 40% of Boyd's adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA). The remainder comes primarily from the Midwest, the Gulf Coast, and Atlantic City.
The benefits of that geographic diversification have shown through during this recent slowdown, as softer results in Las Vegas have been more than offset by steady growth elsewhere.
For example, the Blue Chip in northern Indiana reported a sharp 17% jump in revenues and a 330-basis-point improvement in property-level EBITDA margins. And the Borgata in Atlantic City, which is co-owned by MGM Mirage
Meanwhile, with all of its operations concentrated in one area, Station has had nowhere to hide. Overall revenues were up last quarter thanks to the addition of Red Rock, but a 1% decline in same-store sales suggests that the new high-end property is likely cannibalizing business from other nearby casinos.
Worse still, margins crumbled, and management was forced to slash its full-year earnings forecast by about 20%.
Certainly, the comparative results from one quarter mean very little, but they do underscore the risk at Station, as well as the advantage Boyd has in drawing income from reliable sources outside Las Vegas.
Cards up its sleeve
Boyd has delivered staggering growth rates over the past three years, with annual revenues doubling to reach $2.4 billion and EBITDA spiking from $253 million to $661 million.
However, the company's ambitious development pipeline suggest that these numbers will likely pale in comparison to what is in store for shareholders in the near future.
- First, management is pumping hundreds of millions into property expansions and renovations at existing resorts such as Blue Chip and Borgata to bolster their competitive standing.
- Furthermore, a bold move into the growing south Florida market has given the company control of one of four area parimutuel betting facilities licensed to operate Class III slots -- and it is located within shouting distance of a staggering 2 million potential players.
- Though it looks to the future, Boyd has not neglected its core Las Vegas locals roots. In fact, the company has recently acquired a 40-acre parcel of land in a promising residential location north of town that will soon see a new project under way.
- That just leaves the booming Las Vegas strip, where Boyd is set to begin construction of Echelon Place -- a sprawling $4 billion development using 87 acres of prime strip footage opposite Wynn Resorts'
Clearly, as the company expands its footprint around the country, it will not be lacking for potential growth drivers.
After making nearly $1 billion in capital expenditures over the past year, one could make a similar argument for Station. Unfortunately, it is likely to be Colony Capital that enjoys the rewards from those investments -- not current shareholders.
I'll see your Vegas and raise you Atlantic City
Station is a well-managed, albeit highly leveraged, company that sits in one of the industry's sweet spots.
However, Boyd is entrenched in that same spot -- and in about a half-dozen other exciting markets around the country. It also has deeper pockets and stronger cross-marketing capabilities -- two valuable resources when it comes to pursuing an aggressive expansion strategy.
Yet Boyd is still more attractively valued. That should seal it, but I'll save that discussion for my closing argument.