Wall Street optimistic about slot makers

LAS VEGAS, Nevada -- Wall Street analysts came away from the last month's Global Gaming Expo with an optimistic view of Nevada's slot machine industry.

Whether or not that buoyant attitude translates into sales and increased revenues for the gaming equipment manufacturing sector is up for debate.

Still, analysts told investors in the days following G2E that they were more bullish on slot machine companies than ever before.

"Casino operators appeared more upbeat while walking the exhibit floor," Morgan Joseph gaming analyst Justin Sebastiano wrote in a research note. "We believe the better mood was a result of the combination of attention-grabbing games this year and likely higher slot capital expenditure budgets in 2010."

Slot machine manufacturers have not seen meaningful game sales since earlier in the decade. Casino operators added slot machines with ticket in-ticket out technology through 2005. But the sagging economy over the last two years kept casinos from changing out older games with new products.

Roth Capital Partners gaming analyst Todd Eilers said that is about to change. Both MGM Mirage and Harrah's Entertainment are planning to replace anywhere from 2 percent to 10 percent of the slot machines on their casino floors in 2010, he said.

Also, Eilers said one unnamed Strip resort might switch out up to 40 percent of its older slot machines with newer games.

"The most encouraging sign from our trip (to G2E) this year was that casino operators were actually looking to purchase games and technology versus last year where they were just looking," Eilers said. "Most operators we spoke to during the week indicated they are planning to purchase more gaming equipment next year than this year."

Both analysts said the games at the 2009 G2E were far superior to the games offered at the trade show a year ago. Sebastiano said slot machines built by Bally Technologies, WMS industries and International Game Technology were impressive.

"Most investors and casino operators, were disappointed with the games on display at last year's G2E," Sebastiano said. "That cannot be said about this year's convention. The mood at the exhibits was upbeat, in our view, due to some real eye-popping games."

Slot machine companies offered several common themes and trends, such as advanced community games, multiple wheel game, three-dimensional graphics, increased interactive capabilities, and player customization.

Eilers told investors to consider purchasing the shares of the publicly traded slot machine companies.

"We continue to like the space from an investment standpoint as the industry prepares for a rebound in replacement activity and new jurisdictional openings," Eilers said.