3 Gaming Stocks That Could Boost Your Portfolio Now

by: Stock Croc

WMS Industries (NYSE:WMS-OLD) is perhaps best known to a large segment of the population as the manufacturer of cutting-edge arcade games in the 1970s and 1980s. The newest incarnation of the company is as the manufacturer of various slot style gambling machines used in Nevada, New Jersey, and on Indian Reservations. Gambling is perhaps the ultimate discretionary activity, and thus has a cyclical element in tune with economic conditions.

WMS reported a generally negative tenor on its recent first fiscal quarterly report. The company ended its fiscal 2012 on June 30, 2012, on a generally weak note, with full-year earnings of $1.33 per share, down 25% from the $1.66 per share posted in fiscal 2011. The company also sounded a warning that it intended to up its R&D spending and capital outlays going forward. The first quarter of fiscal 2013, which was reported on November 1, 2012, showed the result of that increased spending. Revenue came to $159 million, slightly above the $155 million in the first quarter of fiscal 2012. Operating margins were up 120 basis points and gross profits were also up by $4 million. But expenses were up by over $3 million both on a sequential basis and when compared with the year-ago quarter. As a result, earnings came to $9.3 million, or $0.17 per share. A year ago, earnings, after adjusting for one-time events, came to $0.24 per share.

Looking forward, the next several quarters will continue the pattern of increased costs and will portend poor profit comparisons. But an ugly piece of litigation also has come into the picture. WMS, along with MGM Resorts (NYSE:MGM), Caesar's Entertainment (NASDAQ:CZR), Penn National Gaming (NASDAQ:PENN) and Azuze Gaming are being sued by MGT Capital Investments (NYSEMKT:MGT). The issue concerns the alleged infringement by the defendants of the Plaintiff's U.S. Patent No: 7,892,088 titled: Gaming Device Having a Second Separate Bonusing Event, issued in February, 2011. In sum, the suit claims the burgeoning use of bonus, multiplayer games violates the patent. As for the popularity of these types of gaming machines, just go to any casino.

What is curious about MGT's suit is the remedy it seeks. It is requesting royalty payments of 1% to 2.5%. The curious part is that a typical royalty agreement is closer to 5%. For that reason, along with the deeper pocketed codefendants involved, the suit will surely be a nuisance, but hardly a game changer for WMS.

Putting this suit aside, the fact is that WMS is sacrificing profits this year for the chance for higher profits down the road. I can respect that strategy, and we are looking at a company that has shed about 40% of its market value since August. If readers believe, as I do, that the referenced litigation is just going to be a blip, and believes, as I do, that the economy is going to pick up, I can see this company doubling or even tripling its market value in the next few years. I can overlook its current, extreme PEG of over 7, due to depressed earnings in recent quarters. However, aggressive investors, take note.

International Game Technology (NYSE:IGT) is a leading manufacturer of slot machines and supporting software, along with progressive slot machine systems in major gaming centers. Its fiscal 2012 ended September 30, but it has not yet made public its fourth-fiscal quarter earnings. In its third-fiscal quarter, it posted earnings of $68.5 million, or $0.23 per share. Despite buying back 23 million shares in the quarter as part of the company's $1 billion buyback plan, the profit level compared poorly with the year-ago quarter's $0.26 per share. Management did provide guidance of full-year earnings of $0.98 to $1.04 per share. It will take an impressive fourth-fiscal quarter to get there though, as through it first three quarters of the fiscal year International Game's adjusted profits came to $0.67 per share.

Looking ahead, International Game has a similar outlook to that of WMS. If economic growth ramps up to boost discretionary spending, the earnings of the company and stock price could well double or more in the next few years.

Bally Technologies (NYSE:BYI) manufactures and markets casino style video games, along with rental equipment for linked, progressive systems. In addition, it owns the Rainbow Casino in Vicksburg, Mississippi. Its fiscal year ends June 30, and in fiscal 2012 had earnings of $179.4 million, or $2.45 per share, swamping, by 35%, fiscal 2011's $1.82 per share. Revenue for the year came to $880 million, up 13% from 2011's $758 million. Management proffered guidance for fiscal 2013 of from $2.95 to $3.30 per share.

In its first fiscal quarter to 2013, Bally continued its progress, reporting record earnings of $32.5 million, or $0.77 per share, up 71% from the year ago quarter. Growth was strong across all the company's business units. Management refined and increased its 2013 estimate to $3.05 to $3.35 per share.

Bally has a healthy research and development budget, and its new, technology driven games, many of which feature pop culture icons, are helping drive overall revenue. Between that, and Bally's worldwide reach, Bally's has ample opportunities to continue its recent growth.

Bally recently received the first ever online gaming license in the United States from the Nevada Gaming Board. The deal will allow Bally to take a leadership position in business to business igaming with Nevada's casinos. In all, I see a company well positioned to take advantage of its current momentum. It is trading with a 5-year PEG of 0.85, and in my opinion is the best run company, and the one most suited to investment, among gaming companies.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.