One of the most popular investing strategies is riding the coattails of deep-pocketed investors, especially activist investors.
Over the years, Singer and his firm have mounted campaigns against the nation of Argentina over its debt default, Compuware (Nasdaq: CPWR), Hess (NYSE: HES), Juniper Networks (NYSE: JNPR), and many others. (I've taken a look in recent months at some of Singer's other moves.)
The latest target for Paul Singer is regional casino operator Boyd Gaming (NYSE: BYD). Elliott Management recently disclosed that the firm owns 5.4 million shares, or 5% of the company.
Singer isn't the only billionaire interested in Boyd. Noted value investor Mario Gabelli and his Gamco Investors also own a 3.1% stake in the company.
Boyd owns 21 casinos in the U.S. At the end of last year, it owned and operated 1.3 million square feet of casino space. Its properties are spread across Nevada, New Jersey, Louisiana, and several Midwestern states. Boyd also operates the Borgata in Atlantic City, owing 50% with partner MGM Resorts International (NYSE: MGM).
The most likely scenario is for Elliott to push for Boyd to split itself in two, spinning its properties off into a REIT. The casino operations would be one company and the properties would be in the REIT. We have already seen this done in the casino industry, when Penn National Gaming (Nasdaq: PENN) split its casino operations from its real estate in 2013.
Boyd's current debt load is masking its potential, and a spin-off would likely increase shareholder value. Shares of Penn National rose as much as 10% in the weeks following its spin-off.
The other focus for Elliott will likely be in paying down the company's debt load. This could come as the company considers strategic sales of properties. Certain REITs that are active in the casino space, including the Penn National spin-off Gaming and Leisure Properties (Nasdaq: GLPI), could be interested in buying up Boyd's real estate.
On the debt front, Boyd has made progress. In 2013, the company paid down its debt by $500 million and reduced its annual interest expense by more than $60 million with a refinancing. Boyd also benefits from having $1.1 billion in net operating loss carry-forwards. This will reduce the company's tax bill, boosting its free cash flow.
Last November, Boyd Gaming launched its real money gambling operation in New Jersey through the Borgata Casino. Being the top property in Atlantic City has allowed the Borgata to capture one-third of the online gaming market in New Jersey.
What investors should really like about this transition to online gambling is that it has been a complementary business, and not a competitor to Borgata's land-based casino. The vast majority of players to the Borgata online platform have been new customers. These online players are now in the Borgata database, and the company can now market its properties to these new customers.
Besides the Borgata, Boyd's properties in Las Vegas and Louisiana are performing well. Its downtown Vegas properties cater to Hawaiians, who come to town on Boyd's Hawaiian charter service.
Boyd's Delta Downs property in southwest Louisiana is doing very well as it is just a short drive from Houston. In the fourth quarter, Delta Downs had record earnings and gambling revenue. Delta Downs is the top property in the area as a result of Boyd's effective marketing program and loyal customer base.
Risks to Consider: The casino industry is extremely competitive, and Boyd faces competition from other casino operators. The casino industry is also highly dependent on the economy, and any economic slowdown would likely result in fewer casino patrons visiting Boyd's properties.
Action to Take --> Buy shares of Boyd Gaming with a price target of $16 for upside of 30%. This would put shares trading at 3.7 times book value, in line with its pre-financial crisis levels, but nearly half of the 7.3 industry average.