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Light At The End Of The Tunnel?

Look toward gaming vendors until things turn around

Light At The End Of The Tunnel?

A funny thing about 2009. The world has not come to an end.

Despite the Samson and Delilah act going on in Las Vegas where the love of beautiful and expensive buildings threatens to bring the pillars tumbling down, the rest of the country is going along about as to be expected in a recession.

Business is down. Expenses have been cut. Projects delayed or canceled.

And people are still gambling. Less than in the best of times, but about the same as last year, which wasn’t bad for the first eight months.

The National Revenue Report published by Fantini Research revealed that gaming revenues outside of Nevada rose 1.17 percent in January. The comparison was helped by five weekends this year vs. 2008, but it was growth nonetheless.

February was more impressive. As of this writing, eight jurisdictions have reported revenue and six of them grew, several substantially-New York 15 percent, Pennsylvania 14.3 percent, for example.

Even states that declined were basically flat if adjusted for the calendar with last February having an extra day, and a weekend day at that.

One such case is Illinois, which declined 5.7 percent. Take out 3.6 percent fewer days, factor in how much a missing weekend day matters, and casinos held their own.

Better yet, Illinois has stopped the double-digit bleeding that beset it in 2008 thanks to the state’s smoking ban. The same is true for Colorado, which has grown revenue so far in 2008 after its smoking ban slammed casinos last year.

More good news is likely ahead as Missouri casinos ramp up following the $500 loss limit repeal, and as Colorado casinos add 24/7 play, craps and roulette, and raise the betting limit from $5 to $100 on July 2.

As we’ve stated before, such regional resilience bodes well for Penn National, Ameristar, Pinnacle, Isle of Capri, MTR Gaming and the Las Vegas locals-regional hybrid, Boyd.

Each of these companies has issues to deal with. They face higher interest rates as they refinance debt, or as they renegotiate covenants. The economy could weaken further, putting more pressure on profits.

But, over time, people will gamble. They will seek entertainment. And recessions end.

For now, the stocks of regional operators appear to reflect a gloom greater than their prospects.

Investors looking for opportunity in gambling stocks also might take a peek at the suppliers.

They’ve been mostly under the radar screen as investors transfixed on woes of the big Las Vegas casino operators.

Suppliers have been hurt by the recession, of course. Slot companies with machines on participation lease suffer lower play, just like the casinos. And casino operators who are tightening their budgets are buying fewer slot machines.

But there are several forces that limit the downside in this economy, and some that actually could prompt growth. Consider:

Balance sheets. Suppliers do not have the huge debt of casino companies, as they did not spend billions of dollars building mega-resorts.

Some, like WMS, are in net cash positions. Shuffle Master generates cash and is paying down debt. Bally has cleaned up its balance sheet. And even though IGT must refinance debt next year and address a $900 million convertible note this year, it generates positive cash.

Participation leases. Casinos might hate sharing slot win with suppliers, but it is appealing to be able to put new machines on the casino floor without having to lay out cash. Thus, hard times could help build the recurring-revenue business for IGT, WMS, BYI and Aristocrat.

Productivity. Whether it is little DEQ or mighty IGT or all those in between, companies can make the case for products that help increase revenue or reduce costs.

Whiz-bang products. Each company has exciting new products, platforms and cabinets that will be must-haves, not just in a recession, but also because of the recession, as it is now more important than ever to be competitive.

Gaming expansion. Governments in the U.S. and abroad are considering gaming expansion to raise revenues. This phenomenon helps lottery companies, too, such as Scientific Games listed in the U.S., Lottomatica in Milan, and Intralot on the Athens exchange.

Obsolescence. Suppliers today are technology companies. And just like computers, iPods, movies, DVDs or other electronic devices, technology forces customers to buy new products. This might not happen in a recession, but afterward, pent-up demand will be released.

Aging slot floors. That lull in the replacement cycle that has held down sales for so many years also means the day is nearing when those machines have to be replaced.

Sales are currently running so low it would take 18 years to replace them. The machines just don’t last that long.

In summary, suppliers are similar to regional casino companies. They’re going through a slow economy, but the business model is not broken, and today may represent opportunity for the investor who can spot winners and be patient.

Frank Fantini is the editor and publisher of Fantini’s Gaming Report. A free 30-day trial subscription is available by calling, toll free, 1-866-683-4357, or online at www.gaminginvestments.com.


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