One of the largest casino entertainment companies in the country, Boyd Gaming (NYSE: BYD) has served customers since 1975. Boyd owns and operates 28 gaming properties in 10 states across the U.S. In Nevada, the company is a market leader outside of the Las Vegas Strip, with 11 properties serving residents in the broader metropolitan area. Boyd prides itself on its proprietary approach to exceptional customer service and guest experience, which the company has coined: “Boyd Style.”
Ariel initiated a position in Boyd Gaming in December 2021. We believe the company is a solid operator with attractive fundamentals in a growing industry. It is rebounding from the pandemic with momentum, posting record operating results that have exceeded estimates. Additionally, Boyd’s successful expense-reduction initiatives have led to high margins, strong free cash flow and efficient debt reduction.
We view the Las Vegas Valley region as one of the most attractive global entertainment markets for investors. Boyd’s targeted marketing campaigns reach tourists from Hawaii, who account for more than half of the company’s reservations. Additionally, its Midwest and South properties include 17 land-based and dockside riverboat casinos across nine states. Despite high competition and regulatory uncertainty, these geographies continue to drive impressive results for Boyd.
Attractive Balance Sheet
Ariel applauds the Boyd management team for its enhanced focus on: improving operating profitability; creating strong recurring cash flow; and implementing effective cost-reduction programs. The company’s financial leverage has declined significantly from pre-pandemic levels, following an effective effort to strengthen its balance sheet and capital structure. While its net debt surged during the pandemic to 7.3x operating cash flow in 2020, Boyd ended 2021 with leverage at less than 2.2x. The company’s debt was recently upgraded by one of the major rating agencies. Boyd’s enhanced profit outlook, solid free cash flow and improved financial leverage metrics have enabled its leadership to aggressively repurchase shares under a new program and to reinstate its quarterly dividend to an amount more than double its pre-pandemic level.
Seasoned Management Team
The company’s leaders bring extensive industry experience and a long history of collaboration. Bill Boyd, Co-Executive Chair of the Board, co-founded Boyd Gaming with his father, the legendary casino developer, Sam Boyd. The Boyd family owns 26% of the company. Keith Smith, President and Chief Executive Officer, and Steve Thompson, Executive Vice President of Operations for the Nevada region, joined the business over three decades ago. Ted Bogich, Executive Vice President of Operations, will be celebrating his 30th anniversary in two years. Ariel’s investment team has built a relationship with Boyd’s Chief Financial Officer, Josh Hirsberg, since his previous role as Treasurer of Caesars Entertainment over 15 years ago. Hirsberg and his colleagues exhibit a passion for the business, and are transparent and aligned with Boyd shareholders.
At its current price, we see Boyd as a compelling investment. Gaming—especially from slot play at casinos—is a more consistent source of long-term profitability, compared to food, beverage and hotel rooms. We believe the gaming segment will continue to be a significant portion of Boyd’s future revenues. Additionally, we believe that Boyd’s strategic partnerships (e.g., a 5% equity ownership in sports betting and online casino company, FanDuel Group) will provide more upside to the company’s valuation.
As of March 31, 2022, shares traded at $65.78, a 24% discount to our private market value of $87.
Masco Corporation (NYSE: MAS) is a leading global designer, manufacturer and distributor of home improvement and building products. For nearly a century, Masco has offered a robust family of brands from its Livonia, Michigan headquarters. Despite rising interest rates and fears of a housing slowdown, Masco is well-positioned to leverage several tailwinds for long-term growth. These include: the company’s recent divestitures; strong brand recognition; and demographic trends driving increased consumer interest.
Market Leadership Across Multiple Sales Channels
Masco’s portfolio of brands includes: Behr®, Delta®, Hansgrohe®, AXOR® and KILZ®. The company’s scale and product mix across design, manufacturing, and distribution make it the ideal provider for two segments. Masco’s global presence and variety of services meet the needs of large retailers. Its luxury brands serve customers in the specialty channel. This unique combination has fostered strong organic growth. For example, Masco’s strategic partnership with Home Depot has created significant income from the professional painter audience—starting with immaterial revenues in 2010 to over $700 million in 2021.
Refined Brand Portfolio is a Competitive Advantage
Rising interest rates have recently battered Masco’s shares, and the long shadow of the 2008-2009 financial crisis still challenges many companies with exposure to the housing market. However, Masco has made strategic changes to its portfolio, making it more resilient.
Masco recently sold its business lines that suffered most during the downturn. This enabled the company to focus on the brands that outperformed during the crisis. Its recently divested businesses—high-priced cabinetry, windows and specialty product lines—experienced a 68% peak-to-trough decline in sales in 2008-2009. This caused the businesses’ total operating margins to drop from the mid-teens to -35%. Comparatively, Masco’s plumbing and decorative product brands—which comprise the current portfolio post-divestiture—saw a peak-to-trough revenue decline of -15% during the recession. While operating margins briefly fell from the low-teens to the high single-digits, they remained positive for these segments during this time period.
Demographic Shifts Fuel Growth Opportunity
The pivotal demographic transition impending in the U.S. is a key growth driver. The Baby Boomer generation (born 1946-1964) can be expected to increase home improvement spending—whether they age-in-place, downsize or relocate. Generation X (born 1965-1980) are expected to upgrade their homes as their families grow. The “millennial” generation (born 1981-1996) is as large as the Baby Boomer population and can be expected to drive demand for new homes. On their heels is the largest cohort in U.S. history: Generation Z (born 1997-2012).
These shifts are occurring while housing is experiencing substantial wear-and-tear due to under-building during the 2010s. In the last decade, single-family home construction per million U.S. inhabitants slowed to half the rate of the prior five decades. This presents revenue opportunity for Masco’s brands.
Investor fears of a housing slowdown and under-appreciation for Masco’s recent business transformation have created a discount to our estimate of the company’s intrinsic value. In our view, shareholders who understand the company’s refined product portfolio will ultimately benefit from a category leader with scale, pricing power, relatively low capital requirements and a prudent capital allocation strategy. Masco should experience modest margin improvements through cost productivity and volume leverage. We believe Masco’s management team should have ample free cash flow to allocate in the future.
As of March 31, 2022, shares traded at $51.00, a 30% discount to our private market value of $72.87.
Founded in 1937 and based in Mayfield, Ohio, Progressive Corporation (NYSE: PGR) is one of the largest property and casualty automobile insurers in the United States. While Progressive is best known as a leader in personal car and truck coverage, the company also holds a strong position in the commercial auto market. Recently, Progressive acquired American Strategic Insurance Corporation, marking its first expansion into homeowners’ insurance. The company now offers a bundled home and automobile solution, distributing policies through digital direct-to-consumer channels and a vast network of over 30,000 independent agents. This updated model is difficult to replicate and strengthens Progressive’s competitive position.
Progressive stands out against peers due to its size, brand recognition, scale and underwriting expertise. Its sizable marketing budget keeps the company ahead of smaller players in a crowded direct-to-consumer market. Avid television watchers are likely familiar with “Flo,” Progressive’s comedic fictional saleswoman and advertising fixture for over a decade. The company also leverages superior data analytics to fuel sales and marketing innovation. For example, Progressive was the first insurer to use telematics – a method of monitoring automobiles using GPS technology to more accurately price policies and target customers. Since then, the company has developed industry-leading capabilities in collecting and analyzing this data. Progressive’s peers that lag in this area are more likely to experience underwriting losses. The company’s approach to data, combined with its strong brand identity provide distinct competitive advantages. For Progressive, these factors have yielded best-in-class results – both in losses to premiums earned and in return on equity.
Policy Rate Changes to Offset Headwinds
The company performed well in the early months of the COVID-19 pandemic. During widespread lockdowns, there were fewer drivers on the road. This meant less car accidents and insurance claims. These trends drove solid profitability and share price performance for Progressive. In the past year, drivers have returned to the roads, resulting in more accidents and claims. Strained global supply chains and inflation have made it more expensive to repair damaged vehicles, increasing payouts to customers. Progressive and other insurers have applied to state regulators for an increase to their policy rates to combat these margin headwinds. Although pricing changes may take time to materialize, the proposed increases should offset inflationary pressures on the industry and the company’s profitability should rebound in the long-term.
Pricing Power Remains
Despite recent challenges, Ariel’s positive outlook on Progressive remains unchanged. The market agrees and the stock has outperformed, which is attributable to the company’s proactive pricing changes in a rising policy rate environment. Progressive’s larger scale and superior customer acquisition resources enable quicker pricing actions and ultimately faster shareholder returns than its peers. The company’s margins have already begun to stabilize over the last several months, indicating that its new rate strategy has succeeded. Progressive is prepared to navigate the moment. Insurance is a non-discretionary purchase for all vehicle and home owners, no matter what challenges the market may bring.
As of March 31, 2022, shares trade at $114, which is closing in on our estimated private market value of $116.23.
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On this page, we candidly discuss three individual companies to illustrate our investment process. These companies are current holdings of certain Funds. The information and our opinions were current as of May 3, 2021, but are subject to change. The information shown does not provide information reasonably sufficient upon which to base an investment decision and should not be considered a recommendation to purchase or sell any particular security. These securities do not represent all securities purchased, sold, or recommended to investors during the period. Past performance does not guarantee future results. The performance of any single portfolio holding is no indication of the performance of other portfolio holdings of any Fund or of any particular Fund itself. Portfolio holdings are subject to change. Click here for the top holdings of the Funds.