Before the financial crisis, Boyd Gaming (NYSE:BYD) was a high-flying gaming company with a 50% share of the hottest resort in Atlantic City and a massive new project in Las Vegas. But a combination of poorly timed bets, no international exposure, and a weak middle class has left Boyd underperforming rivals Las Vegas Sands (NYSE:LVS) and MGM Resorts (NYSE:MGM).
Where did Boyd go wrong, and what should investors do now? There's a lot to the story, but Las Vegas holds the key to what went wrong.
A disastrous bet on The Strip
Boyd had plans to turn the land that once held the Stardust Resort & Casino into its first Las Vegas Strip megaresort when it imploded the icon in 2006. Construction began on a $4 billion resort that was supposed to have four hotels, a 650,000-square-foot convention center, and a 140,000-square-foot casino on the emerging north end of The Strip.
But on Aug. 1, 2008, Boyd halted construction because of the weak economy, and the project never started up again. As you can see below, the property barely got off the ground before construction was halted -- a huge blow to Boyd's ambitions.
The ill-timed bet was finally sold to Genting Group last year for $350 million, but with the money already sunk into the property, Boyd had to take a $994 million charge because of the sale. Boyd wasn't the only one with an ill-timed Las Vegas Strip resort, but it was a huge hit for a company that was just trying to establish itself as one of the giants in gaming.
Regional gaming isn't coming back
To make matters worse, regional gaming was hardest hit by the recession. Not only does Boyd have exposure to the Las Vegas locals market and New Jersey, it has resorts in Illinois, Indiana, Louisiana, and Mississippi. When the recession hit, these markets suffered because consumers cut back, and they're more reliant on the middle class than Las Vegas, which attracts high rollers.
The problem wasn't so much gaming as a whole, but rather states expanding gaming to increase revenue. According to the American Gaming Association, since the U.S. gaming market peaked in 2007, at $37.52 billion in revenue, the industry only fell 8.6% total by 2009 and was nearly back at a record level by 2012.
But over those five years, Pennsylvania, Kansas, New York, and many other states have expanded gaming, or are in the process of doing so. That dilutes each gaming dollar to more casinos and results in the 10% drop in EBITDA since the start of 2007 despite a 43% rise in revenue.
No international exposure
Not only does Boyd not have the Las Vegas Strip exposure that has helped MGM Resorts grow slightly since the recession, it doesn't have any of the Asian exposure that has caused a profit boom for Las Vegas Sands and a boost for MGM as well.
Macau has become by far the largest gaming market in the world, at $48 billion, and Boyd has been shut out of that market as well as Singapore, both of which are driving Las Vegas Sands right now.
MGM is also performing better because it isn't nearly as concentrated in the regional gaming or Las Vegas locals markets, and it gets a boost from its 51% ownership in MGM Macau.
A light at the end of the tunnel?
Boyd does have a lead in the U.S. in online gaming, where Borgata and its partner partypoker held a 38.4% market share of New Jersey's online gaming market in May. Borgata alone held 29.8%.
Online gaming is one of the few potential high-growth markets in the U.S., and Boyd is gaining a foothold that will help it if gaming is legalized nationally.
Outside of upside from online gaming, I don't see much of a reason for investors to jump into Boyd Gaming. The company's exposure to the weakest markets in the U.S., regional gaming in particular, will keep revenue from growing significantly in coming years, and $4.3 billion of debt hangs over the company. There are simply better places for investors to place their bets, and Las Vegas Sands and MGM Resorts would be a good start.