Is it Time to Consider Gaming Equipment Stocks?

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As always, please don't consider these stocks as a recommendation. Rather they represent my market analysis based on the screening criteria chosen. You’ll need to do your own due diligence to determine whether any of these are attractive investment candidates for you.

As you can see, these companies are all small- to medium-sized and trade at remarkably close P/E ratios of about 17.5X forward earnings. For each of these names, it’s a discount to the average over the past five years. The balance sheets are strong for most of the group. I have included a different valuation metric to try to adjust for differences (Enterprise Value to EBITDA, which compares the market cap plus net debt to earnings before several items). In this case, the valuations are still relatively close, though one of the companies with a lot of cash stands out as inexpensive compared to the group. Sales momentum has been mixed, with two companies shrinking over the past year and two growing. Earnings for the group have been similar but are expected to grow this year for all of the companies.

Bally Technologies (BYI), which prior to 2006 was Alliance Gaming, got out of the casino business in 2009 and is now focused solely on gaming equipment, operations and systems. They're increasingly seeing sales that draw from all three areas due to the use of high-speed networks that allow for convergence. International sales are about 20% of their mix. R&D is 10%, up sharply over the past few years.

International Game Technologies (IGT), the largest of the four, has about 28% of sales from outside the U.S. A little over ½ of sales come from gaming operations, a figure that's directly related to wagering volume in casinos, while the rest are from products, like video and spinning reel machines. R&D is 10%, up from several years ago.

Shuffle Master (SHFL) is the company I have looked at most closely, as it recently hired a new CEO that will likely continue the excellent sales momentum they have enjoyed. 40% of this company's business isn’t really the same as the other three companies – it is productivity-enhancing technology like deck shufflers and chip sorters. Also, the company leases a lot of its products, leading to a business model that enjoys about 50% recurring revenue. International represents 51% of sales. R&D is 10%, up from several years ago.

WMS drastically reduced its outlook earlier this month, sending the stock close to a two-year low. 60% of their sales come from products and 40% from gaming operations. About 30% of sales come from outside the U.S. R&D is 14%, up over the past few years.

SHFL looks the most interesting to me, and I am considering adding it to my watchlist. Of the rest, I believe that WMS merits the most attention due to a historical performance, a strong balance sheet, high investment in R&D and low valuation compared to the group. Again, do your own due diligence before investing.

Perhaps I will have more to report after my “field trip” next month to Las Vegas, but for now, I think that the time may finally be right to invest in the gaming suppliers. This subsector of the gaming industry seems poised to benefit from new technology that enhances the customer experience and improves the efficiency of the casino.

 

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