I can’t say it’s as much fun following the gaming technology side of the market as it is talking about resorts and casinos. I much prefer the eye candy afforded by Vegas resorts to two face cards in front of me when playing blackjack.
Nevertheless, tech is the infrastructure Vegas is built on — along with everything X-rated — but writing about the latter doesn’t necessarily earn me kudos in editorial … so let’s shuffle up and deal some gaming stocks:
Bally Technologies (BYI) is quite the legacy name in the gaming space. It’s been coming on very strong recently and last week reported record Q4 earnings of $37.3 million that were up 56% year-over-year (EPS of 95 cents were better by 56%). Bally also announced a 19% increase in systems revenue (a record), grew its installed progressive base by 38%, total revenue was up 8%, and operating income increased 32%.
Bally also is buying Shuffle Entertainment (SHFL), which will augment its entire offering base. But most importantly for this investor, Bally is really well-positioned to take advantage of the growing movement in online gaming. It’ll only be a matter of time before online gaming is legalized, and Bally will have the tech geeks to handle it.
BYI has very manageable debt of $580 million, which it plans to start paying down. The company generated EPS of $3.45 per share this year, and is aiming for a median estimate of $3.93 next year, or 14% growth. However, it trades at 18 times earnings, making it a bit expensive — for this investor, anyways.
International Game Technology
Venerable International Game Technology (IGT) reported earnings late last month. Revenues increased 8.7% YOY, much of it driven by new product sales, which were up 12%.
But as I said, it’s online gaming that I want to look at, and the company’s interactive segment saw revenues roar up 69% to $73 million, much of it from social gaming. Its DoubleDown casino game was the top-grossing game on Facebook (FB).
IGT has really tended to its balance sheet, holding a solid $302 million in cash, offset by very manageable debt of $835 million. Free cash flow YTD is a solid $183 million, and that’s after paying $55 million in dividends (a payout that just increased from 10 cents to 9 cents, and that’s after jumping a penny from 8 cents earlier in the year).
International Game Technology is aiming for $1.31 EPS this fiscal year, and analysts see 14.5% long-term growth. The company seems fairly valued at 15 times earnings, and given its long track record and solid interactive growth, this could be a nice growth play to add to your portfolio.
WMS Industries (WMS) reports next week, but I’d stay away from it. Its free cash flow is negative, it’s struggling in the growth department, and it isn’t making too many popular games. WMS is too limited by its focus on the domestic market and spends a lot of money on R&D.
Scientific Games Corporation
Finally, Scientific Games Corporation (SGMS) is focused on the lottery business. I don’t care for the lottery business in general because it isn’t much of a growth industry, and there are a finite number of clients. Not surprisingly, SGMS reported a modest 4% increase in YOY revenue and a 15-cent-per-share loss in the most recent quarter. It also had negative free cash flow of $10 million through the first two quarters, and it’s loaded with $1.45 billion in debt. Only lottery ticket buyers are supposed to be in debt … not the ticket seller.
As of this writing, Lawrence Meyers did not hold a position in any of the aforementioned securities. He is president of PDL Broker, Inc., which brokers financing, strategic investments and distressed asset purchases between private equity firms and businesses. He also has written two books and blogs about public policy, journalistic integrity, popular culture, and world affairs. Contact him at firstname.lastname@example.org and follow his tweets @ichabodscranium.