Article Excerpt:
TWST: David, give us an idea of what you're covering in the gaming space.Mr. Bain: For the most part, given some of the long-term fundamentals at hand, we're focusing in on the suppliers but we don't lose sight of the casino operator stocks by any means. That said, we do have a bent right now to about 75% suppliers with the rest being casino plays due to our overall thesis for gaming suppliers.
TWST: And that thesis is?
Mr. Bain: There are a couple of different major themes that we believe
should drive supplier growth. One is forthcoming disruptive technology
that should allow for an acceleration of the replacement cycle of gaming
equipment over the next couple of years, and another is general gaming
expansion across the globe.
TWST: Let's start with the disruptive technology.
Mr. Bain: Several years back, ticket in/ticket out solutions on slot
machines began to proliferate as a cashless wagering technology that
required most casinos to replace their entire floors to be able to
handle the technology. During this transition, we experienced a faster
replacement cycle for games. At the ticket in/ticket out replacement
height, about 20% of games were being replaced per year. Now we are back
down to about a 12%-14% replacement cycle. But during that time of 20%
replacement per year, we saw heightened multiples and significant
earnings growth in the supplier sector. While TITO certainly provided
disruptive technology that led to an increase in supplier earnings, we
think that the next one could even be a bigger cash cow for suppliers
and that's downloadable games. We think downloadable gaming will come to
fruition in the next year to two years, a slow ramp but with possible
acceleration further out. There are obviously some key approvals that
need to take place in some gaming jurisdictions, but what makes it so
compelling are the financial models being discussed with regard to
downloadable gaming. For the most part, you're going to need new
hardware and there's going to be a need for a constant stream of
software. That should lead to more recurring revenue and higher margins
for the suppliers as well as one-time equipment sales, so as
downloadable games become more of a viable option for casinos, we think
it's going to benefit the suppliers the most. It will obviously benefit
the casinos as well in that they can play to a different demographic at
different times of day and theoretically increase the win per day per
unit on their slot machines, depending on which games they choose to run
at the time. The other reason we like the suppliers is generic gaming
expansion, which leads to increased markets for vendors to sell into. We
think it's a timing issue. It's a science of predicting when and not if
expansion will accelerate domestically and abroad. Gaming is becoming a
form of entertainment rather than a vice. For instance, we often cite
stats from the American Gaming Association. The AGA says that the
overall acceptability of gaming has remained high over the past five
years. In fact, one survey they did showed that 80% of adults believe
that it's an acceptable form of entertainment for themselves or others.
The rest of our excitement and belief in the long-term expansion
fundamentals comes by way of actual ongoing physical gaming expansion
legislation. Again, that's a question of timing but the fundamentals are
in place. What I look to are different governments seeking to fill
budgetary coffers to carry out other non-gaming initiatives such as
education. In essence, the expansion of gaming is like an indirect tax
mechanism on consumers. We have done several studies on the history of
expansion and it shows some trends that should benefit the supplier
space for several years. In the US, you started with the approval of
gaming in Nevada in the 1930s. Then you had New Jersey approve gaming 40
years later. There was another lull but by the early 1990s, several
states began to institute commercial gaming in riverboat markets like
Colorado, Illinois, Indiana, Louisiana and so forth. This really began
to kick things off. From there, we saw tribal gaming begin to take hold
in the late 1990s. It really began to accelerate as governments began to
see the expansion of gaming as a way to increase budgetary coffers to
complete their political initiatives. Just recently we've seen the
advent of what are called racinos or slot machines at race tracks. The
expansion of gaming devices in different jurisdictions and venues has a
direct impact on the earnings of gaming suppliers. We think that the
United States could have some room to grow in terms of charities,
lotteries, casino expansions and some new markets, but we also note
what's happening on the international stage. Other countries are
beginning to take notice of what the US has done, which is really still
the pulse of gaming. We think the international stage carries huge
potential for the future of suppliers, and it's just now beginning.
Tickers included in this excerpt: AGI, CNTY, HET, IGT, MGAM, MGM, O, PENN, PGIC, SGMS, SHFL, WMS, WPTE, WYNN
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