Morgan Stanley Upgrades Boyd Gaming, Says Casino Selloff Has Gone Too Far

Casino stocks have been out of favor, and Boyd Gaming (BYD) has felt it. On Monday, two Wall Street firms said the pain has gone far enough.

Morgan Stanley upgraded Boyd to Overweight from Equal Weight. Susquehanna moved it to Positive from Neutral. Both trimmed their price targets to $83, from $89 and $87 respectively, according to Behind the Markets' summary of Monday's rating changes.

Notice the odd combination: an upgrade with a lower target. That's the analysts saying the business is a bit less profitable than they thought, but the stock has fallen even further than the fundamentals justify.

The stock traded near $70.61 on Monday, up roughly 1%. That's just above its 52-week low of $65 and far below its high of $91.41. The market cap sits around $5.1 billion, and the dividend yield is near 1%.

Morgan Stanley's note, which analyst Stephen Grambling wrote, calls gaming one of the worst-performing sub-sectors the bank covers. As CNBC reported in its roundup of Monday's analyst calls, the firm told clients to buy the dip.

The reason isn't that demand is booming. It's that the damage hasn't been evenly spread, and Boyd is in the part of the market that is holding up better.

"However, demand trends are more nuanced, with Regions/LV Locals more resilient. As such, we upgrade BYD to OW with ~15% upside potential and favorable risk-adjusted return." — Morgan Stanley research note

That's an important distinction for anyone who owns casino stocks. Boyd runs regional casinos across the U.S., plus a large Las Vegas locals business, which serves residents rather than tourists.

Locals customers visit often and don't rely on flights or hotel stays, so that segment tends to behave more like a neighborhood business than a travel one. Morgan Stanley is betting that stability will show up in results.

A TheFly summary of the note on TipRanks said the analyst called the valuation "too cheap to ignore." The stock's slide toward its lows, in other words, may reflect worries about the whole gaming group more than anything specific to Boyd.

Wall Street isn't unanimous, though. Only five of the 11 firms tracked by Behind the Markets rate Boyd bullish, and six are neutral. The average target is about $89.55, which suggests roughly 27% upside.

The new $83 targets imply around 18% upside from Monday's price. Morgan Stanley's own framing was about 15% upside with favorable risk-adjusted return, so it isn't claiming a moonshot.

That's actually a more credible pitch than a wild target. A modest, defensible gain from a beaten-down name with a dividend is a normal value setup.

The risks deserve equal weight. Regional gaming has slowed, and the consumer backdrop isn't getting easier. Last week's hot inflation readings and higher oil prices squeeze the discretionary budgets of the exact customers who visit regional casinos.

If the broader consumer weakens further, even the more resilient locals business could feel it. And with the stock only about 8% above its 52-week low, a break below $65 would change the picture quickly.

Both upgrades also came with lower targets. Analysts cutting numbers while raising ratings is a sign that earnings expectations are still drifting down, even if the pace is slowing.

For investors, the setup is straightforward. Boyd is a value-and-recovery idea, not a growth story. The upgrade case rests on the stock being too cheap relative to a business that's holding up better than its peers.

If you want exposure, consider building a position gradually rather than all at once. The $65 low is a sensible line to watch, since a stock that stays above it after two upgrades is showing real support.

On the upside, the first level to watch is the mid-$70s. A move there would suggest the market is starting to agree with Morgan Stanley's view that the selloff overshot.

The next catalyst is Boyd's third-quarter report. Pay attention to Las Vegas locals and regional trends, since that's where the upgrade thesis lives or dies.

Bottom line: Two upgrades don't make Boyd a sure thing, but they give beaten-down casino investors a reason to look again, with $65 as the line in the sand.