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Gaming stocks still on a winning streak
Many gaming stocks have soared over the past couple of years. But these three, at least, hold hot hands and should continue to climb.
By Michael Brush
With gaming stocks like Station Casinos (STN), Ameristar Casinos (ASCA) and Penn National Gaming (PENN) tripling or more since we wrote about them two years ago, you might think its time to cash in your chips and move on.
Not so. Place your bets, again.
The group as a whole isn't cheap. But selected stocks will continue to thrive as the industry benefits from several trends, including the rise of poker and breakthroughs in gambling technology.
America puts on its poker face
In case you havent noticed, we have become a nation of poker lovers. Thats one reason shareholders of WPT Enterprises (WPTE, news, msgs), which has made a name for itself broadcasting the World Poker Tour series on the Travel Channel, enjoyed an exhilarating ride last year. At $17, the stock has nearly tripled from where it came public last summer.
The question for investors now is simple: Will our infatuation with the age-old game of bluff go the way of the Macarena? Or will it endure like hip-hop, despite early predictions of its demise?
No one knows for sure.
But to improve your odds of knowing, it helps to understand the dynamics behind poker's new popularity. One big factor: WPT Enterprises made televised poker worth watching by giving viewers an inside look at the hands of all contestants, running commentary from experts and updated appraisals of the odds of winning for each player.
We tried to create something where the audience really feels like they are in the seat of the poker player, says WPT Enterprises finance chief Todd Steele.
Viewers feel connected in another crucial way, he says. Because it's easy for the average Joe to get into the early rounds of tournaments that eventually lead to a seat in the winners circle, the World Poker Tour has a certain Cinderella quality. Everyone feels like they have a shot at hitting the big time. It is the only major sport open to the general public which you can watch one week and play against the professionals the next week, says Steele. Players also love easy online access to ongoing games.
The appeal seems powerful. And this is why Frank Husic of Husic Capital Management, which has a big position in the stock, thinks pokers popularity will endure for at least another season.
And over the next 12 months, the company has three specific plans in place for capitalizing on the poker boom.
First, the company is about to enter the world of online casinos -- an estimated $2 billion annual market. Operating an online gaming business is illegal in the United States, so WPT Enterprises will go after international punters. Next, the company is increasing international distribution of its TV show. That will generate revenue and drive new users to WPT's online poker games.
Finally, the company is rolling out branded merchandise, including playing cards and poker chips, tables, hand-held poker games and apparel. Video games and slot machines are around the corner. For example, Take-Two Interactive Software (TTWO, news, msgs), publisher of the hugely successful "Grand Theft Auto" video game series, recently signed with WPT to produce poker video games.
All this should lead to about $1 per share in earnings in around 12 months, predicts Nicholas Danna, a sell-side analyst with Sterne, Agee & Leach, with a double in earnings from there not too far away. If so, that would make WPT a $23 stock in a year, says Danna. Your main risk to owning these shares: Poker turns into another Pet Rock.
Mastering old tasks, new games
Shuffle Master (SHFL, news, msgs) produces the gizmos casinos use to shuffle cards, and has a 90% share of that market. It's a mundane task, but Shuffle Master the company is anything but dull. Sales grew by 48% in the last quarter while earnings were up 29%. That type of growth helped fuel a 75% advance in its shares in the past 12 months.
Despite the impressive move, more gains lie ahead as the company uses high-tech tools to change the face of gaming.
Shuffle Master already offers voice-activated blackjack monitoring software called Bloodhound, which helps spot cheating and card-counting.
Next, it plans to roll out what it calls an intelligent table system. This is a network of cameras embedded in tables -- along with radio-frequency identification tags in poker chips -- that helps casinos better track what goes on at tables, says Todd Griesbach, who follows the entertainment sector for Columbia Wanger Asset Management.
The system can identify the most profitable players, so casinos can offer freebies to keep them around. It also helps rate dealers and catch cheats.
Shuffle Master also has shown a knack for discovering new table games that go beyond traditional attractions like blackjack. Casinos are hungry for new specialty games to draw younger, wealthier gamblers.
One recent Shuffle Master success: Three-card poker. Of the 20,000 gaming tables in U.S. casinos, 1,300 are devoted to the game. Thats more than the next two specialty table games combined. Shuffle Master bought the concept in 1999 for $3 million, and now takes in $15 million to $20 million a year in royalties on the game.
Now Shuffle Master is using technology to get its popular three-card poker into venues where it would otherwise be prohibited -- like racetracks in states that ban table games. Shuffle Masters solution: a version of its three-card poker game where a video dealer hands out cards to gamblers sitting around a table. We just started shipping those, and the response has been excellent, says Shuffle Master CEO Mark Yoseloff.
Shuffle Master's shares may look fully valued, with its shares trading at 33.6 times the coming year's earnings. But its track record suggest more gains lie ahead. It is not a cheap stock. It has a healthy multiple, says Griesbach. We have trimmed our position back. But we still think it is very high-quality, extremely well-run business.
The technology behind the games
International Game Technology (IGT, news, msgs) is the biggest producer of slot machines in the world. Recently, that reputation hasnt done much for shareholders. The stock is down more than 30% since last spring, recently trading at $30.
Investors are fleeing because the current replacement cycle for slots is winding down. Casinos once scrambled to put in machines that use money cards instead of coins. Now they are nearly done.
But investors selling for this reason are shortsighted, says Christopher Bonavico. He thinks IGT investors luck will change, which is why he holds shares in the Transamerica Premier Focus fund (TPAGX, news, msgs). The fund is up over 5% in the past three years compared to gains of just over 1% for the S&P 500 in the same time frame.
Pessimists are missing two big trends ahead for IGT, says Bonavico.
First, slots will soon start using the server-software model. These machines will let casinos switch games quickly by downloading them into slot machines -- to satisfy rapid changes in gambler tastes. IGT is in the testing phase right now, and many investors wonder whether this model will ever take off.
But the concept makes sense because it will give casinos greater flexibility and lower game prices. For IGT it means lower installation costs. True, game price declines seem bad for IGT. But the company will sell a bigger variety of them without needing to install new machines. That means higher margins.
The second trend: More and more states will approve or expand gambling. Local, state and national governments all need money, and gaming is much more politically acceptable than raising taxes or cutting back on teachers, says Bonavico. States new to gambling often start with slot machines.
Transamerica Investment Management believes in these themes so much, it increased its already sizable position in IGT by a third in the final quarter of last year.
IGT has been buying its own shares, too, typically a positive sign for a stock. The company has authorized the purchase of 35.8 million shares. The bottom line: All these trends should help the stock, but it is hard to know when. This makes IGT a classic buy-and-hold stock for patient investors.
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