The same day Nevada reported its first year-over-year decline in gaming revenue in eight months, Boyd Gaming executives cited a softening Las Vegas economy as contributing to first-quarter declines in revenue and adjusted earnings.
The Las Vegas Strip reported $715.8 million in gaming revenue in March, a 1.2% decline from the $724.6 million in March 2023. The Strip is up 2.5% for the first three months of the year.
Downtown Las Vegas generated $76.1 million in revenue, a 12.8% decline from $87.4 million in March 2023. Downtown is down 3.4% for the year, according to numbers released Thursday morning by the Nevada Gaming Control Board.
Locals casinos recorded $270.9 million in gaming revenue in March, a 0.4% increase over the $269.7 million in March 2023, but up 2.4% for the year.
Thursday afternoon, Boyd Gaming reported first-quarter revenue of $960.5 million versus $964 million in the first quarter of 2023 and total adjusted EBITDAR of $330.5 million in the first quarter compared to $367.1 million. The company remains optimistic, however, that improvement is in the cards for the rest of the year, despite softening of lower-tier customers.
Shares of Boyd Gaming stood at $68 on April 1 and just below $63 at the close of the market on Thursday before the company released its earnings report. They opened at $54 on Friday and closed just over $53.
In a note Friday morning, analyst John DeCree with CBRE reiterated Boyd’s Buy rating, but lowered the price target from $82 to $76. The locals’ macroeconomic backdrop remains strong, but higher operating expenditures, new competition, elevated promotional activity from competitors with the Durango Casino opening, and normalizing consumer-spending trends are leading CBRE to moderate its forward estimates for the segment.
“Las Vegas locals EBITDAR missed consensus and declined 12.5% year over year,” DeCree wrote in the note. “The impact from Durango, a very tough year-over-year comparison, and some softer consumer trends all weighed on the locals segment. Investors were caught off guard by the magnitude of the year-over-year decline, but the locals’ EBITDAR had declined mid-single-digits in each of the previous three quarters.”
Carlo Santarelli, an analyst with Deutsche Bank, said Boyd had its “second challenged” quarterly report of the last three and, after a multi-year outperformance in shares, downgraded Boyd from Buy to Hold. His $71 price target is down $7.
“While we still view Boyd as a strong relative value play within the gaming sector, we struggle at this time to identify near-term catalysts, a change in the cadence of property-level results, or an event that triggers a re-rating in shares, though a sale or partial sale of the FanDuel stake would certainly be multiple enhancing,” Santarelli wrote. “From an operational perspective, we think EBITDA growth will be hard to come by, with the Las Vegas locals market showing clear signs of slowing, regional markets continuing to grind lower year over year, and costs increasing. Over time, within the group, it has been rare to see multiples re-rate higher in the face of declining EBITDAR.”
Joseph Greff with J.P. Morgan wrote that there’s “no way to sugarcoat” Boyd’s earning miss, which he called “broad based and very surprising.” He moved to a neutral rating from a prior overweight and lowered the year-end 2024 price target to $67.
While Greff is neutral about the soft results in the Midwest and South segments, due to bad weather and higher airfares impacting Hawaiian visitation, he’s concerned about the state of the low-end gaming consumer.
“We are nervous about this dynamic, especially in the Las Vegas locals market, as well as increased competition and promotions in that market,” Greff said. “We are lowering our estimates to incorporate a soft lower-end gaming consumer and much higher than previously modeled flow-through to EBITDA from these revenue declines. While the optimist in us would point to easier year-over-year comparisons going forward, we struggle to find a reason why this consumer would be stronger in the second quarter through the rest of this year versus the last 12 months. Other than valuation, we are hard pressed to find a catalyst for the stock. We feel reasonably comfortable about the higher end in Las Vegas Strip and locals segments, but are incrementally concerned for operators with lower-end consumer exposure.”
David Katz with Jefferies Equities Research reiterated a Hold with a price target of $65.
Barry Jonas with Truist Securities maintained a Buy rating, but lowered the price target from $80 to $75. He likes Boyd for low leverage, real-estate ownership, continued capital returns, and its 5% ownership stake in FanDuel.
DeCree said while there are signs of softness in Las Vegas and other segments, the shares have been oversold, as Boyd and the industry continue to fight persistent inflation, normalizing consumer trends, tough comparisons, and limited external-growth options.
“That said, current valuation levels appear to be pricing in a much deeper recession and earnings impact,” DeCree said. “Shares of Boyd are currently trading around seven times our new fiscal-year 2025 EBITDA estimate. Considering Boyd’s 5% stake in FanDuel that we estimate could be worth upwards of $10 a share, the implied trading value of the core casino business is closer to six times. Plus, Boyd owns the vast majority of its casino real estate. In spite of some ongoing softness, these levels are too attractive and we continue to recommend the shares of Boyd with a Buy rating.”
In a positive point, DeCree said the success at Red Rock Resort’s Durango property helped increase gaming revenue for locals casinos by 0.4%, saying, “the ramp at Durango” continued to fuel marketwide growth. “We continue to see evidence of a healthy Las Vegas local consumer.”
Beyond Boyd and locals properties, DeCree said March gaming-revenue comparison throughout Nevada was difficult, since March 2023 set an all-time monthly slot-win record in Clark County. There was also a strong event schedule in March 2023.
Despite that comparison, slot handle increased, though the win declined. Table win increased 4%, due mostly to an easier hold comparison, and baccarat win has now increased nine consecutive months, highlighting the continued recovery in international gaming volumes.
Strip hotel occupancy fell 2.2 points in March and average daily room rates fell 17% in March, which DeCree attributed in part to the fall off in convention attendance. In addition, the opening of Fontainebleau Las Vegas added nearly 3% to the room total. “We attribute this month’s occupancy decline more to the tough convention comparison as we haven’t seen any notable impact from the new room inventory to date.”
Downtown Las Vegas gaming revenue isn’t as bad as it looks, despite a 12.8% decline in gaming revenue, DeCree said. He cited the timing of slot collections and lower hold on tables.
In its earnings call, Boyd executives said the trend of higher airfares limiting Hawaiian visitation is reversing.
Santarelli mentioned that management noted some encouraging trends in February and March, primarily related to core-customer volumes and margins, while also speaking somewhat favorably about April.
“Net-net, while the January hole was clearly greater than anticipated from an EBITDAR perspective and despite the favorable commentary around the subsequent months, we simply don’t see much to merit conviction in a consumer re-acceleration in drive-to gaming markets, over the near term,” Santarelli said.
During the earnings call, Boyd CEO and President Keith Smith said it’s difficult to understand what’s driving the softness in the economy. Looking at the locals market over the last three months adjusting for a new competitor, it has declined mid-single digits and going back to January and February, there were some small declines on a trailing three-month basis.
“So the market has been soft for a couple of months,” Smith said. “It’s not just March. Our core customer is actually performing well. We continue to see growth from that core customer. It’s more the retail customer where we’re seeing the softness. The retail customer is more economically sensitive. My guess is that customer is simply being more cautious about spending discretionary dollars. … What we’re seeing within our numbers, I would say it’s fairly consistent with what we saw in February and March. We’re not seeing an acceleration of the softness and we’re not seeing the reversal of the softness.”
The Las Vegas locals market is being carried to growth by Durango, which Santarelli estimates is adding $18 million to $20 million per month in gaming revenue, with the balance of the market down mid-single digits.
Boyd executives alluded to increased promotions from competitors dealing with Durango taking away some customers from the Gold Coast and Orleans. They also noted that cannibalization from Durango remains in line with the $20 million to $25 million estimate.
Santarelli, however, said that direct competition from Durango has been “comfortably below the guidance, though this has been obfuscated” by the indirect competition from third-party promotional efforts.
“We think Boyd is experiencing top-line headwinds akin to the balance of the market, with the Strip-adjacent assets performing a bit worse,” Santarelli said. “We believe the performance at Gold Coast, and perhaps Orleans, relates primarily to competitive efforts at Palms and Rio, both of which have been aggressive in recent months. At present, we think the Las Vegas locals market is likely where regional drive-to markets were in 2022, with gross gaming revenue having gone negative and a slow grind lower in GGR likely the environment for the near to medium term. Notably, the unrated and retail customer in the Las Vegas locals market remains above 2019 play levels and we believe this customer is most likely to continue to drive the declines in GGR.”
As for Boyd’s Midwest and South segments, Santarelli said he was surprised by the sequential weakness in its margins and that it’s “a struggle to see how the gaming consumer of tomorrow is better than the gaming consumer of yesterday. As such, we think a slowing of decline is the likely scenario” for the region as the year progresses and expense increases are lapped in the second quarter of 2024.
