Gaming Partners International: Playing With Microchips

Jun.14.07 | About: Gaming Partners (GPIC)

A few years ago, investing in gaming companies was almost a sure thing: the U.S. boom was catching fire as more states approved casino gambling. Investors were raking in their share of the dough as Las Vegas became a glittery sin city and gambling became entrenched in communities across the country.

Casino operators must be ever vigilant to nail the cheats who mistakenly think that they’ve got a sure-fire way to rip off the house, whether they’re in Vegas or Iowa.

Meet Gaming Partners International Corp. (NASDAQ:GPIC), a Las Vegas company whose products are part of the global casino landscape. It supplies gaming chips, table layouts, plaques and jetons, roulette wheels, cards and dice.

GPI holds 70% of the world’s poker chip market, with sales of its chips increasing 30% to $75 million in 2006. While traditional chips remain in vogue, what's really attracted the casino operators’ attention is the company’s chips embedded with RFID microchips, the improved version of which has been on the market for less than two years.

The Radio Frequency Identification Device, or RFID, technology places a microchip in the casino currency, in an attempt to cut down on counterfeiting, as well as counting errors or theft by casino employees. It tells the casino where the chips are at all times while in the establishment – or when someone tries to take them out the door.

The chips also help casinos weed out the wanna-be high rollers who spend thousands of dollars on chips in order to qualify for casino food, room and drink comps, then cash out without betting a dime.

While RFID chips have been around since 1996, only in recent years has the cost come down significantly, while the technology has improved with new frequencies enhancing security. Non-RFID chips cost about $0.70 to make, with the RFID technology adding about $0.50 to the manufacturing cost. Gerard Charlier, the president and chief executive officer of GPI, said in a 2005 interview with The Wall Street Journal that in 1996, the company began selling the RFID chips for about $6.50 apiece.

Gaming Partners can also incorporate such security measures as holograms, ultraviolet or infrared pigments, and see-through inserts to help head off customer or employee shenanigans.

Gaming Partners International was created in 2002 as the result of the merger of French firm Bourgogne et Grasset, the American companies Bud Jones and Paul-Son Gaming Corp. in late 2002, under the leadership of B&G. It also has offices in France and Mexico.

Needless to say, selling a product that could cut down on fraud and help revolutionize the way casinos track gamblers and employees has given GPI’s stock a huge boost since it began skyrocketing from about $5 in late 2004 up into the mid-$20s. That is, until May 15, when some of the more skittish investors began wondering if the company’s boom times were over. On that day, it released its delayed financial report for 2006 and the previous fourth quarter. Shares fell the next day as much as 26% after the company reported fourth-quarter 2006 earnings of just a penny a share, compared with $0.26 a share the year before; analysts surveyed by Thomson Financial had expected $0.11 EPS. It was the Nasdaq’s biggest percentage loser on May 16.

The company indicated the report was in part delayed by accounting “deficiencies,” related to meeting Sarbanes-Oxley requirements. In mid-2006 it fired Deloitte and Touche as its accounting firm and hired a new chief financial officer.

Looking at its report for all of 2006, Gaming Partners did quite nicely. Revenue increased 29.5% to $74 million, as net income rose 18.5% to $5.1 million. Earnings per share increased to $0.62 from $0.53, on a diluted basis. Its order backlog did shrink from $25.7 million at the end of 2005 to $5.5 million as of Dec. 31, as it filled some large pending orders.

Investors who kept their poker face on through the turmoil could have benefited six days later, when Gaming Partners rolled out its first-quarter report. The company did post a loss of $1.5 million, or $0.18 a diluted share, compared with a profit of $2.1 million, or $0.25 a diluted share, in the first quarter of 2006. It noted that it has received “several other large orders” from Macau casinos “for which it will recognize revenue in the second and third quarters, and anticipates additional orders to be placed throughout the remainder of the year.”

A statement accompanying the results from CEO Charlier had an optimistic tone. “While we are disappointed with our performance in the first quarter, we believe that the greatest adversity is behind us.”

Despite the fickleness of investors the week before, this report didn’t trigger a selloff; the company’s shares rose nearly 3%.

The gaming industry in general – and Gaming Partners in particular – have their sights set on Macau, the former Portuguese colony that in this age of a more open China represents untapped potential of 1.3 billion gamblers. Globalysis, a Las Vegas research and advisory firm, is predicting that Macau’s gambling revenues will increase nearly 18% this year to $8 billion, making it the global gambling capital, surpassing Las Vegas.

Gaming Partners has announced in recent weeks a flurry of chip orders, which could stack the decks in its favor: The Venetian Macau, Crown Macau, Planet Hollywood Resort & Casino in Las Vegas, to name a few.

This company is delivering cutting-edge products that are likely to remain in demand for quite some time. It’s a company worth considering.

GPIC 1-yr chart


Disclosure: none