Gaming Partners Is Catalyzed To Rise

| About: Gaming Partners (GPIC)

On December 1, 2011, Gaming Partners International (NASDAQ: GPIC ) announced a program to repurchase up to 5% (or approximately 410,000 shares) of the company's outstanding shares. On December 30, 2011, the company entered into a trading plan in accordance with Rule 10b5-1 under the Securities Exchange Act of 1934. The plan will be administered through an independent broker beginning no later than January 31, 2012 and expiring May 15, 2012. To put this into perspective, the average daily trading volume over the past three months has only been 4,000 to 5,000 shares. This means that the company will have to soak up an overwhelming majority of the liquidity over the next several months in order to successfully execute the repurchase program. That's a meaningful catalyst to drive the stock higher.

Gaming Partners, a manufacturer and distributor of casino table game equipment and supplies worldwide, is currently trading at $6.62 per share (as of February 1st) or an Enterprise Value to EBITDA multiple of a mere 3.6x. The company has generated $8.2 million of EBITDA over the past twelve months and is sitting on over $25 million of net cash. Therefore, almost half of its market capitalization is sitting in cash! Over the last twelve months, the company has spent approximately $1.1 million on capital expenditures, meaning that Gaming Partners is currently generating a free cash flow yield of roughly 24% (defined as [EBITDA - CAPEX]/Enterprise Value). This stock is cheap. My guess is that Gaming Partners will repurchase its shares until the price hits $10 per share (over a 50% premium). At $10 per share, the company will be valued at roughly 7x EV/EBITDA, which is much more reasonable considering that competitors like International Game Technology (NASDAQ: IGT ) currently trades at 8.3x EV/EBITDA, Bally Technologies (NYSE: BYI ) is valued at 10.1x EV/EBITDA, and WMS Industries (NYSE: WMS-OLD ) trades at 6.2x EV/EBITDA.

The bottom line here is that management recognizes the company's shares are undervalued. Gaming Partners is sitting on a mountain of cash, and a portion of that cash will be used to repurchase the company's shares. Because of the stock's relatively low daily trading volume, the share price has nowhere to go but up.

Disclosure: I personally own shares of GPIC. The accounts that I manage also own shares of GPIC.

Disclosure: I am long GPIC.