2006 in Review: Boyd Gaming

Following a late-summer swoon, it has been full-speed ahead for many casino-related stocks, and Boyd Gaming (NYSE:BYD) is no exception -- it has surged nearly 33% over the past three months.

However, even with those gains, the shares are still sitting at breakeven over the past six months or so, and barring a holiday rally, they could easily finish the 2006 calendar year with a loss.

Considering the gaming industry has been a standout performer this year, posting average gains north of 50%, you would think there would be concrete reasons why Boyd has lagged its peer group so badly.

And you'd be right.

With the previously robust growth rates in the Las Vegas locals market showing signs of slackening, the struggles of both Boyd and rival Station Casinos (NYSE:STN) have been well-documented over the past several quarters.

T-minus 12 months
Heading into 2006, it was full speed ahead for Boyd. Annual revenues had just leapt 26% from the year before to reach a record $2.3 billion, and earnings had been racing ahead by 34% annually over the previous three years.

However, a few cracks began to appear on April 25, when the company released its first-quarter results. For the most part, the numbers were just fine. In fact, all three of the firm's primary operating segments posted solid revenue growth and double-digit EBITDA gains. Boyd's downtown properties reported their strongest first quarter ever, with profits rising 23% to $14 million, while those generated in the key central region advanced 50% to hit $84 million.

Unfortunately, the core locals business was unusually soft. In stark contrast to the healthy 26% earnings growth in the first quarter of 2005, seven of Boyd's eight locals casinos posted flat results. Overall revenues did tick 18% higher, but the new south coast property was responsible for all of the gain -- and that resort would soon be sold to former partner Michael Gaughan.

Not coincidentally, the shares reached their 52-week high of $54.72 on that same day, and it has been a bumpy ride ever since.

Unfortunately, second-quarter results announced July 27 showed the same mixed performance. Once again, strong results in New Orleans (Treasure Chest) and Indiana (Blue Chip) carried the central region to solid double-digit gains in both revenues and earnings. However, with the Las Vegas locals market slow to digest the first significant capacity increase in years, Boyd's bread-and-butter locals business remained sluggish. The introduction of Station's high-end Red Rock Resort in Summerlin captured more than a few of Boyd's customers -- particularly at Suncoast, where profits plunged 23% for the quarter.

Yet once again, the earnings release marked an inflection point in the stock, as the shares have been steadily gaining ground since the announcement. In hindsight, my headline "Has Boyd Reached Bottom?" now looks to be somewhat prescient, as the stock hit a 52-week bottom at $33.42 that exact same day. I can take no credit, though, since I was bullish even before the decline.

From peak to trough in exactly three months, this brings us to Boyd's most recent quarterly report card in October -- which, in a word, was "more of the same." OK, make that four words.

Heavy promotional spending appeared to make little headway, as revenues in the locals segment dipped from $214 million to $200 million. Fortunately, those raked in by the six casinos in the firm's central region rose 15% to $241 million, just enough to lift overall revenues for the period into positive territory. Unfortunately, the same can't be said of adjusted earnings, which tumbled 24% to $38.8 million.

On the rebound
Despite the soft headline numbers, Boyd has shared some positive news recently. To begin, management has taken steps to better integrate the Boyd and Coast brands and unite its different loyalty programs into a unified, one-card system. Following the lead of Harrah's, this move should promote additional cross-market play and encourage more visits to the firm's Las Vegas hub.

And speaking of Harrah's, the firm has recently given Boyd a valuable 24-acre parcel of land in exchange for the outdated Barbary Coast casino. The swap will give the company 87 acres (one-fourth of a mile) of prime footage on the western side of the strip, while Harrah's will own a phalanx of adjacent properties on the eastern side.

What the crowd says
Boyd is still a company in transition. The uncertain near-term outlook for the locals market has weighed heavily on the stock. But unlike rival Station, Boyd has many other income sources to fall back on, including solid producers in established markets from the Gulf Coast to the Midwest, not to mention the red-hot Borgata in Atlantic City.

And in a few years, the $4 billion Echelon Place development is likely to hit the ground running on the resurgent north end of the strip.

Despite recent concerns, our CAPS community has an overwhelmingly bullish opinion on Boyd. In fact, all 17 "All-Star" players who have registered an opinion are expecting the stock to outpace the S&P 500.

Here's what one of those participants, bienv, had to say:

"Casino gaming continues to rise in popularity. Not sure how much Boyd will take advantage, though, but they could be a good target for a merger or acquisition down the road."

Buy and hold
In response, I would have to say that as the industry's third largest player, Boyd stands ready to take full advantage of the rapid expansion of gaming around the globe. As for being a buyout target, that is also a strong possibility.

Flush with billions in cash pouring in from wealthy investors and institutional money managers seeking higher gains, private equity funds have been making deals at a record pace, including five of this year's six largest buyouts.

Given the consistent cash flows and valuable real estate assets of casino operators, it is not surprising that companies like Aztar, Harrah's, and Station have all found their way onto the wish lists of these private equity groups.

According to speculation, Boyd might well be next. However, as a shareholder, I would gladly forfeit the short-term bounce from a takeover in favor of the long-term gains that the stock is likely to deliver over the next decade.

Check out the other companies featured in "The Motley Fool's 2006 in Review and 2007 Preview" special.

Do you believe in the law of large numbers? Visit our CAPS center -- home to 18,000 players and 265,000 recommendations -- to see which stocks have been assigned five-star ratings.

Fool contributor Nathan Slaughter owns shares of BYD but none of the other companies mentioned. The Fool has a disclosure policy.