I regularly screen for micro- and small-cap stocks that are trading at a discount, but are profitable with projected growth moving forward. Gaming Partners International Corporation (GPIC) was one of these companies that appeared on my screener, and being a former avid poker player, I decided to take a closer look at the stock after having some success with other gaming companies like Bally Technologies (BYI) and International Game Technology (IGT).
Gaming Partners is a leading manufacturer and supplier of casino table game equipment, including casino chips, table layouts, playing cards, gaming furniture and more. The majority of these revenues come from the sale of casino chips, where it's a world leader in terms of market share and sells under brands like Paulson, Bud Jones and BG.
In February 2012, Enclave Asset Management disclosed a 4.1% stake in a 13D filing with the SEC and took an active interest in Gaming Partners. Mr. Jeffrey Gerstel sent numerous communications expressing concerns about the company's ability to grow, excessive cash surplus, conflicts of interest and non-timely disclosures of material contracts and transactions.
While half scathing in nature, the activist's involvement presumably led to a continued special dividend issued in December of 2012. Operating results have also improved with the company reporting in its most recent 10-K filing that revenues jumped 3% to $62.9 million and net income rose 65.6% to $3.7 million, primarily due to higher sales of chips and furniture in the U.S.
Last quarter, Gaming Partners reported revenues that fell 4.3% to $14.8 million, but the fall was attributed largely to unusually high sales during the comparable period in Macau and the U.K., according to the 10-Q filing. Meanwhile, gross profits fell 19.5% due to a temporary shift toward lower margin products and the late deferral of a delivery of a major order.
So, while these results may seem bearish on the surface, there appear to be explanations for both downturns. During FY 2013, the company believes that casino openings, expansions and rebrandings in the U.S. will provide additional revenue opportunities, while they delivered the first sales of its newly developed casino currency and furniture products during Q1 2013.
Potential discount value
Gaming Partners trades with price-book, price-sales and price-earnings ratios that are well below industry peers and the S&P 500 in some cases. According to Morningstar, the company's price-earnings ratio of 12.7x is below the industry's 48.1x average and the S&P 500's 16.8x average, while its price-sales multiple of 1.1 is half of the industry's 2.2x multiple.
When looking at the balance sheet, the company's price-book multiple of 1.4x remains below the industry's and the S&P 500's 2.3x multiple. The company's cash position may have taken a small hit with the special dividend, but it remains at nearly $17 million, as of March 31, 2013, leaving significant room for additional dividends in the future (as it has paid before).
Risks and considerations
Some key risks that I see with the stock are:
- The questions raised by Enclave Asset Management cause some concern, but the response issued by the Board of Directors answers many of them.
- The U.S., European or Asian casino industries could take a downturn, but in the U.S. at least, it appears that the industry sees growth ahead.
- The valuation multiples may be undervalued relative to the industry and S&P 500, but they are historically high for the company itself.
- The company trades closer to its 52 week high of $9.05 than its low of $5.90 per share, although the stock has taken a breather lately.
To answer the title of this article, I believe Gaming Partners is an undervalued stock, but it lacks a catalyst moving forward with the casino market likely growing at a slower pace than FY 2012. That said, the Board of Directors could do more to unlock that value using its $17 million in cash other than simply buying back stock. I plan on keeping an eye out for such a catalyst and potentially building a starter position in the stock if it retraces a bit lower.