Analyst Takes Look at Gaming Stocks

23 September 2004

CHICAGO, Illinois – (PRESS RELEASE) -- Investing in gaming stocks may not be as much a gamble as in years past. Ian Wyatt looks into the industry and points to one clear winner. Read about WMS Industries (NYSE:WMS), Alliance Gaming (NYSE:AGI), International Game Technology (NYSE:IGT), and even Shuffle Master. Ian Wyatt is editor of the Growth Report newsletter.

Here are the highlights from the Featured Expert column:

As someone who's a bit leery of investing in hotel and casino operators - seems like a fickle business that will only grow more competitive by the day, one where the name of the game is warm bodies in hot seats - I'd be more interested in the guys selling the picks and shovels to the gaming industry. As with the California Gold Rush of old - as much as with the technology boom of the late 1990's - the guys selling the infrastructure to the guys selling the dream seems like a safer bet.

In this sense, companies such as slot makers WMS Industries (NYSE: WMS), Alliance Gaming (NYSE: AGI), International Game Technology (NYSE: IGT), and even Shuffle Master (Nasdaq: SHFL) which makes card shuffling equipment and game tables for casinos, become more interesting targets for investors.

Though all of these stocks have done well over the past several years, clearly International Game Technology has grown larger and faster than the rest. Now, a $2.5 billion business with a roughly $10 billion market cap, IGT stands to gain if the newly proposed monster casino of the West Coast - a 600,000 square foot beast just outside San Francisco with 4000 to 5000 slot machines - is built to expectations. This positive news for a company like IGT also comes on the heels of Schwarzenegger granting, with US Interior Secretary Gale Norton's stamp of approval, five Native American tribes the right to operate an unlimited number of slot machines over the current 2000-slot statewide limit. A huge win for the slot makers, though I'm still a bit lost as to who has the disposable income to dump quarters into those machines on a regular basis. But that's a debate of a different nature.

For IGT, all of this government wheeling and dealing with the Native American tribes offers it a nice position to be in. Moreover, with a bill allowing up to 61,000 slot machines in Pennsylvania and two new casino licenses being awarded in St. Louis, Missouri this year alone, it's no wonder IGT also announced a new 600,000 square foot facility in Las Vegas housing manufacturing and warehouse space, engineering, sales and casino services. Though Wall Street can't seem to make up its mind on the stock - CIBC World Markets upgraded it from Sector Perform to Sector Outperform in July, after downgrading it from Sector Perform to Sector Underperform in May, while Merrill Lynch took it from a Buy to an all-out Sell just as Roth Capital upped it from Neutral to Buy - investors appear willing to embrace the stock. And the company is rewarding them in kind.

IGT has beat earnings expectations three of the last four quarters, with a 6.1 percent surprise to the upside in its June 2004 quarter when it reported income of $0.35 per share. Revenue is expected to climb from $2.46 billion in 2004 to $2.59 billion in 2005 with earnings likewise expected to increase from $1.34 per share this year to $1.52 next year. On a forward price-earnings ratio for 2005, that would mean IGT would be trading at 19.77 times earnings, just shy of the industry average of 20.08 - though investors clearly should give IGT some premium in the future for being the market leader and having the ability to capture the lion's share of all new slots business.

Though the company has nearly as much debt as cash - debt is roughly $1.1 billion while cash is $1.24 billion as of its most recent quarter - cash flow remains strong at $860 million for the trailing twelve months. With essentially two lines of business - product sales and proprietary gaming - the company has the ability to generate income from the pure design, development and manufacturing of computerized gaming systems as well as from the recurring revenue arrangements and equipment leasing agreements of it proprietary gaming group. Tallying up nine month revenues - obviously a company favorite time period - IGT reported that net income from continuing operations jumped 37 percent from a year ago to $375.4 million, while revenues increased 18 percent to $1.86 billion over the same time frame.