Gaming Stocks: Betting On The House

by: Justin Kuepper

One in five Americans participating in a survey conducted by Opinion Research Corporation thought that playing the lottery was their most practical strategy for accumulating several hundred thousand dollars. Unfortunately for gamblers, it's the casinos and gaming stocks that ultimately profit from these trends.

Perhaps more Americans are trying to solve their financial woes with gambling, or perhaps it's the brighter economic outlook, but gaming stocks have seen a modest rally over the past month. According to Tickerspy's index, the sector is trading up 14.5% over the past 30 days, which is some 12.7% better than the benchmark S&P 500.

Stocks included in this index are:

  1. Bally Technologies Inc. (BYI)

  2. International Game Technology (IGT)

  3. Multimedia Games Holding Company Inc. (MGAM)

  4. Scientific Games Corp (SGMS)

  5. Shuffle Master Inc. (SHFL)

  6. WMS Industries Inc. (WMS-OLD)

A Look at the Industry's Top Performers

Shuffle Master was the top performing stock in the group over the past month (up 24%), while Multimedia Games Holding Company was the best performer over the past year (up 93.2%). Both of these companies were driven by improving earnings rather than less tangible factors, like industry M&A or technical factors, which is a positive sign for long-term investors.

Surprisingly, despite the move higher, the sector also appears to be attractively priced with low price-earnings ratios relative to their growth rates (PEG ratios).

Shuffle Master Announces Solid Results

During the first quarter, Shuffle Master reported earnings of 14 cents per share, compared to 11 cents per share estimates, on revenues of $56.1 million, versus a $51.1 million consensus. The company also announced the acquisition of Ongame Network for EUR19.5 million in cash, which marks a shift into the blossoming online gaming industry (specifically, poker).

The company attributed the growth to strong demand for its new MD3 shuffler, increasing popularity for its progressive table games, and continued momentum in its slots business. Despite the strong growth, the firm trades with a modest PEG ratio of just 0.93, according to Yahoo Finance, which suggests that it may yet be undervalued given its growth rate.

Multimedia Games Moves into the Black

Multimedia Games Holding Company has a similar story. During its first quarter, the company reported revenues that jumped 22% to $34.8 million, and earnings per share of $0.21 compared to a loss of $0.05 a year ago. These results were driven by the company's expanded footprint in New York's lottery and other non-Oklahoma segments (where its primary market exists).

The company believes that it has only captured a small portion of the U.S. gaming market, according to its most recent earnings call, which means that it has a great opportunity for growth throughout the U.S. And with a PEG ratio of just 0.79, according to Yahoo Finance, the company still offers investors a great value given its growth rate.

Capitalizing on the Sector's Growth

Gaming stocks appear poised to continue their growth and offer attractive multiples to investors looking to take a position now. Investors looking for a conservative way to gain exposure to the industry may want to consider initiating a long position and then writing covered calls to reduce their breakeven point over time and ultimately lower risk.

Alternatively, those looking to hedge against a downturn in the overall gaming sector, but still remain bullish on gaming equipment stocks, may want to consider a semi-pair trade against an industry ETF, such as Market Vectors Gaming ETF (BJK). By purchasing puts on this ETF and going long the aforementioned gaming stocks, investors can create a full or partial hedge.

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