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Howard Stutz

Boyd sluggish without Strip presence

27 April 2007

LAS VEGAS, Nevada -- While it spends much of the next three years building the $4.4 billion Echelon on the former Stardust site, Boyd Gaming Corp. will rely on its Las Vegas locals properties and the Borgata in Atlantic City to carry the bulk of the company's revenue stream.

The announcement of the casino operator's first-quarter earnings Thursday highlighted that.

Boyd Gaming said net income during the quarter ended March 31 was $33.5 million, or 38 cents per share. The company's earnings were below the 54 cents per share estimate of analysts polled by Thomson First Call.

When the results from discontinued operations are factored in, including a $285 million pretax gain from the sale of the Barbary Coast to Harrah's Entertainment, Boyd Gaming's net income was $216.3 million, or $2.44 a share.

In the first quarter of 2006, Boyd Gaming reported a net income of $65.3 million, or 72 cents a share.

Quarterly net revenue this year fell 12.3 percent, to $517 million from $589.6 million.

In a move to appease investors, Boyd Gaming said it will pay shareholders a quarterly dividend of 15 cents per share on June 1, an increase of 11.1 percent from the previous payment.

During a conference call with analysts and investors, Boyd Gaming executives discussed several upcoming development projects, including a June 19 groundbreaking date for Echelon, a $400 million expansion to the Borgata, a $130 million endeavor to add a hotel tower to the Blue Chip casino in Indiana, and a casino expansion at its recently purchased jai alai facility in Florida.

"Generally, we thought Boyd's results were a little disappointing, with (cash flow) and earnings per share coming in toward the bottom end of the guidance range," Goldman Sachs gaming analyst Steven Kent said in a note to investors. "We are concerned that Boyd's key markets (Atlantic City and Las Vegas locals) face some competitive and promotional challenges, which may affect profitability over the near term. Although this may be offset by the dividend increase, credit facility update and on-schedule projects in the pipeline."

In Las Vegas, Boyd Gaming said its locals segment, which includes the Coast Casinos brand and Sam's Town, reported net revenues of $218.7 million in the quarter, a decrease of 2 percent compared with $224.1 million a year ago, while cash flow was $74.6 million, down 8 percent compared with $82 million in the first quarter of 2006.

The company's downtown Las Vegas casinos generated net revenues of $63.8 million in the first quarter, down from $64.5 million last year, while cash flow was $13.9 million, off slightly from $14 million in 2006.

Nevertheless, Boyd Gaming President Keith Smith said the locals market showed resiliency despite new competition, such as Station Casinos' Red Rock Resort. He said the downtown properties nearly matched last year's first-quarter results, which were record totals.

In addition to the Dania jai alai facility near Fort Lauderdale, Fla., the company operates riverboat casinos and racetrack casinos in Indiana, Illinois, Louisiana and Mississippi.

"We've grown to a size and scale as a company that is now five distinct operating units," Smith said. "We believe our locals property have rebounded well from capacity additions and will be a strong, solid unit."

Smith said the company's downtown casinos have prospered despite a market that as a whole has seen monthly gaming revenue decreases for nine straight months.

"We have done well with our customer base in Hawaii, we have a steady product and a strong management team that understands the market," Smith said.

Deutsche Bank gaming analyst Bill Lerner said results from the company's locals properties were encouraging.

"Notably, (results at) three of the four Boyd locals properties were flat (we believe Suncoast was the only decliner), suggesting new locals supply is nearly absorbed," Lerner said in an investors note. "We look for continued sequential improvement in the second quarter, especially given the recent Red Rock (first) anniversary."

Shares of Boyd Gaming closed Wednesday at $47.09 in trading on the New York Stock Exchange, down 87 cents, or 1.81 percent.

"We expect the shares to be under some pressure given the results, but we think that most investors own the stock for projects to open in 2008-10," Kent said.

The Stardust closed in November and was demolished in March to make way for Echelon, an 87-acre development that will include five hotels -- the 3,400-room centerpiece Echelon resort and four smaller boutique hotels.

During its construction, the Strip will not generate much if any in the way of revenues.

"The Stardust was a small overall part of the company," Smith said. "Echelon will more than make up for that presence on the Strip. In the meantime, we see us having a steady performance in the central region (which now includes the Florida property) and the Borgata continuing to be the market leader in Atlantic City."

During the quarter, the Borgata, which Boyd Gaming operates in partnership with MGM Mirage, had its gaming revenue climb 7.5 percent and nongaming revenue increase by 19 percent over last year. Raw numbers were not revealed.

An 800-room, 43-story boutique hotel, dubbed The Water Club, is expected to open in early 2008, which would complete the Borgata site.

Smith said that despite the current plate of development opportunities, Boyd isn't done growing. He said the company is still evaluating when and what it wants to build on land it secured in North Las Vegas.

"We'll continue to look for new development or acquisition opportunities," Smith said. "We'll be selective."

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