Happy Days Are Here Again

Slot manufacturers are hitting new highs, so where is the ceiling?

Happy Days Are Here Again

Investors in gaming supplier companies have been enjoying the stock market’s bull run as much as, or more than, those in other industries or even other sectors of the gaming industry.

After a long period in the doldrums, they have become high fliers again with Aristocrat, IGT, Scientific Games and Everi at or near new highs.

Aristocrat is easy to understand. The company has been hitting on all cylinders for several years with accelerating success. Sci Games and IGT beat third-quarter earnings expectations and issued bullish outlooks both for their underlying businesses and in balance sheet improvement, alleviating concerns over the high debt taken on in their mergers of recent years. And Everi, the smallest of those mentioned so far, seems to have caught fire with a new slot cabinet and games.

And each company deserves plaudits for managing its way through difficult times of high debt taken on for acquisitions, especially in a stagnant if not, in many regions, declining business environment.

As examples, Sci Games has reduced interest rates by three-quarters of a percentage point while cutting debt-to-EBITDA to 6.7 times, from times at its peak. Everi has reduced interest expense by $8 million in recent refinancings, on top of savings from May transactions.

Further, suppliers today have a ballast, as it were, that they didn’t have when they were primarily selling and leasing slot machines. For Sci Games and IGT, it is lotteries that provide steady revenues to smooth out the volatility of the slots business. Everi has its original business, payments, to provide the stability.

Aristocrat has developed a different kind of stabilize—online gaming, especially social casino.

That segment is growing rapidly organically and through acquisitions. The latest purchase, Big Fish Games from Churchill Downs for $990 million, brings Aristocrat’s digital revenue to 38 percent of the company’s total. And, while digital is a competitive arena, the sector does have a recurring revenue dynamic to it.

The success of Aristocrat’s stock reflects the fundamental gains made by the company. Those gains stood out clearly in Aristocrat’s recent earnings release in which it announced a whopping 41.3 percent rise in net profit to A$495.1 million in fiscal 2017 on a 15.3 percent jump in revenues to $2.454 billion.

Aristocrat’s success is also illustrated in the latest Eilers-Fantini Quarterly Slot Survey. The company scored 27 percent ship share in the third quarter, nearly double its market share and 11 percentage points above its trailing 12-month average.

Finally, supplier companies are benefiting from North American casinos loosening their purse strings nearly a decade after snapping them shut in reaction to the Great Recession.

The Eilers-Fantini survey again offers evidence of that, as participating casinos reported that they intend to replace 7.4 percent of their existing machines with new ones over the next 12 months.

One of the interesting phenomena of recent years has been the rise of the small supplier.

For a long time, IGT had more than 60 percent of the North American market, while Aristocrat, Bally, WMS and a few others divided up the rest.

After the long round of mergers that saw Sci Games acquire Bally and WMS and Lottomatica acquire IGT to go along with its existing slot holdings, such as Spielo, the conventional wisdom was that the industry had consolidated and stratified. Dynamism was over.

Yet, the opposite has happened. Again, look at the latest Eilers-Fantini survey: Everi ship-share was 6.5 percent, five points above its historic market share; Incredible was 2.6 percent, up 2 points; Ainsworth was 2.3 percent, up a full point from its historic market share; companies intended to spend 3 percent on AGS machines, which compares to its Class III market of zero not all that long ago.

Nor does all of this reflect the dynamism elsewhere on the casino floor. Electronic table games, almost non-existent a decade ago, now represent 4 percent of machines in North America and a quarter of games in some international markets. That opens more possibilities, such as for Interblock.

This dynamism can create opportunities for investors in some of these emerging companies. AGS may go public sometime soon. That possibility exists for Interblock. Ainsworth is about to get a huge, deep-pocketed owner when Novomatic closes on its 53 percent purchase of the company.

In short, what many thought was a dead space two or three years ago has become a dynamic space.

 

Casinos Doing OK, Too

Gaming suppliers aren’t the only companies enjoying a bull market.

Casino operators of all types—big, small, domestic and international—have enjoyed bull runs with stock price gains far outstripping most other industries.

At Fantini Research, we identified three small stocks in April 2016 which we thought investors knew little about.

They were all Nevada-based casino operators controlled by founding families and benefiting from their own special situations and the booming economies of Las Vegas. Since then, the stocks, which I dubbed the Nevada Triple Play, have soared:

Eldorado Resorts+215 percent
Golden Entertainment+155
Monarch Casino+130

These kinds of gains are gratifying to see, as are those of so many other gaming stocks. They also suggest a need for vigilance as we head into a new year. So, we’ll hope the good times continue to roll, but with an eye out for pitfalls.

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