Make Gains From Gambling's 'Rise Of The Machines'

by: Insider Monkey

by Anil Nain

Poker's hot streak over the past decade appears to be cooling, if recent reports from Las Vegas are to be believed. In the last two months, 8 poker rooms are said to have closed and replaced with slot machines. Since mid 2007, Poker revenues have increased only 5 of 43 months since 2007, and generally, the per-table win has diminished to early 1990's levels, according to UNLV's Center for Gaming Research. As context, Table-poker generated revenues of $123 million in 2012, a decrease over its peak of $168 million, contributing just 1.13% to Nevada's total gambling revenues of nearly $11 billion in 2012.

But while the fervor of table poker may be diminishing, don't cry for Vegas just yet. Despite a recent drop in revenue-- the Nevada Gaming Commission recently announced January numbers indicating a 12.4% drop in year over year revenue-- gaming tax collections are still up 5.5% for the first two-thirds of the fiscal year. And more broadly, Nevada's total revenues gaming revenues have grown by 240% over the past 28 years, at twice the rate of table games.

So overall, while the last six months of Vegas appears to be one relative stasis, if we were to see a rise of machines, here are few names that could benefit from an uptick in slot trends. Aside from market-beating strategies like ours (see how one has beaten the market by 20 percentage points in just six months), this list should provide ardent investors a solid starting point for further research.

International Game Technology (NYSE:IGT) announced recently that its Board of Directors declared a cash dividend of $.08 cents per share on its common stock, a 33% increase over the same quarter last year. Extending the longest streak in the gaming industry, this marked the 40th consecutive quarter that the company has paid dividends. The company that designs and makes gaming machines and systems has already seen improved interest from the smart money, as hedge funds' invested capital of the 450-plus funds we track (learn why we track them here) in IGT spiked by almost 7% last quarter.

SHFL Entertainment (NASDAQ:SHFL), meanwhile, supplies products in a number of gaming categories, including electronic table systems. The company produces various products involving popular table game content using e-Table game platforms and electronic gaming machines, which include video slots and so-called "igaming." The latter features online versions of SHFL's table games, and spins them toward users with a penchant for social and mobile gaming. With no dividend and fair valuation metrics across the board, the true attractiveness behind SHFL is its growth prospects; Wall Street expects EPS to expand by 15% a year over the next half-decade. This is nearly twice the rate SHFL has averaged over the past five years, and places the company in the top third of the entire consumer goods sector.

Scientific Games Corporation (NASDAQ:SGMS) agreed to acquire WMS Industries (NYSE:WMS-OLD) earlier this year for about $1.5 billion, or $26 in cash per common share. While the acquisition remains subject to a number of conditions, including the receipt of gaming approvals and authorization by WMS shareholders, the companies recently announced they had received notice from the FTC regarding early termination of the deal's waiting period required under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (the "HSR Act"). Interestingly, analysts' average price target on Scientific Games represents a 6-7% upside from current levels, and it's difficult to be bearish on the WMS merger.

Bally Technologies (NYSE:BYI) makes video machines, casino management interactive applications, and networked, server-based systems for the global gaming industry. The company recently announced that by leveraging the flexibility of Visionary Solutions' AVN encoding platform, it can now stream high-quality HD, 1080p resolution video and audio content to gaming areas and hospitality suites. While growth isn't as impressive as what's expected of SHFL, shares of Bally traded at a forward earnings multiple below 14x, third lowest in the gaming activities industry. Hedge fund legend Jim Simons was upping his stake in this company at the end of last year (check out Simons' newest stock picks).

Of course, what's in vogue at any given time appears to be a historical crapshoot. For example, in the mid-eighties, 77% of all casino games were based on Blackjack, compared to about 50% last year. Craps, in 1985 contributed 28% of all table wins, compared to around 9% in 2011. Despite this uncertainty, the companies mentioned above give investors a good way to play an uptick in slot trends.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Business relationship disclosure: This article is written by Insider Monkey's writer, Anil Nain, and edited by Jake Mann. They don't have any business relationships with any of the companies mentioned in this article and they didn't receive compensation (other than from Insider Monkey and Seeking Alpha) to write this article.