When taking a look at the consumer services sector one sector that has seen bullish price performance is the gambling sector. Over the last six months the gambling sector has been up over 30%. Within the gambling sector casinos are a big component of the sector. For investors that are looking for places to invest outside of casinos, but still having exposure to the gaming market, then I would consider Gaming Partners International (GPIC).
When considering investing in a bullish sector of the market, one area that I frequently take a look at is niche stocks. In my opinion niche stocks are companies that provide a specialty product and/or services that participate in the upward movement in the sector. Another way to take a look at niche companies is their abilities to service a wide range of companies in a particular sector. For a look at previous articles on niche companies please click here and here.
GPIC is headquartered in Las Vegas, Nevada that operates in one segment with three subsidiaries that include Gaming Partners International USA, Gaming Partners International SAS and Gaming Partners International Asia Limited. In my opinion, I consider GPIC a casino niche play since the company provides products and services that are essential to the casino industry. GPIC is the leading supplier for casino radio frequency identification devices (RFID). These devices are often seen inside casino chips, which in turn allow the casino to accurately track casino chips. When looking back at GPIC financials 66% of their revenue comes from casino chips with 37.6% in American style and 28.4% in European style. The other 34% of the company's revenue comes from playing cards, dice, table accessories and other products. Besides RFID devices in casino chips GPIC also provides solutions for table games. Gaming Partners International provides concealed readers in table games that allow for faster checking of money on the gaming table. Faster checking of money can help speed up table game play and allow for increased table game rounds; which in turn can lead to more profit for a casino.
Spending money at a casino can be viewed as highly discretionary and casinos are always looking for ways to view how people spend money to properly reward their play. GPIC also provides technology to casinos that read chip counts on table games. By casino pit bosses being able to accurately read chip counts they can accurately track and reward players. This technology allows casino management to track and follow more players.
The Gaming Industry
Niche companies can sometimes be tricky to invest into since they are dependent on the sector growing and expanding in order for niche companies to participate in gains. If a particular sector is showing slow growth and expansion companies may not consider updating new technology and would rather wait. Currently, there is strong growth in the Asia-Pacific sector of gambling; especially Macau and growth in the Asian gaming markets is set to eventually surpass the United States. As legalized gambling markets across the world gain traction the need for improved casino technology should follow. When casinos decide to invest into GPIC RFID technology this technology generally has a lifespan of 5-7 years. When gambling companies invest in technology in order to generate higher profits they will generally want to stay with a particular company, since there are thousands of chips at a casino and the cost of switching chips, table games and other areas of the casino can be costly.
Since late November 2012 shares of GPIC have gained over 20% and the stock has been in a trading range between six and eight dollars over the past year. The company has also seen solid annual earnings that have increased from the prior year and are expected to increase through 2014. Currently, GPIC has no short-term debt and a P/E around 12.5 that can be seen as fairly valued.
GPIC recently just broke through the $7.00 price level and now appears heading toward $8.00 (a level not last seen since mid-2011). Strength in Asia can also be seen in the company's backlog for signed orders. While GPIC backlog decreased for U.S. and SAS the company has increased their backlog for Asia with a decent increase that can be viewed as more growth to continue.
The one main risk factor for GPIC that could hold shares back is the company's dependence on the opening and expansion of newer casinos. Growth and expansion in the gambling industry attribute to higher gross profit margins and during the last quarter GPIC was able to increase gross profit from the same period last year. With shares of GPIC approaching the $8 level I would be cautious and rather be a buyer on pullbacks. GPIC may be a small cap stock, but with an inexpensive P/E, and no debt I like the predictable prospects moving forward. For investors that already own shares of publicly traded casinos and are looking at niche/alternative investments in the gambling sector, GPIC is a stock that could be a nice complement to existing casino holdings.
Disclosure: I am long GPIC.