Slot makers scramble to tap new markets

April 02, 2002 9:15 AM
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A bump in the road, or a roll into the ditch? Slot makers ”” and investors ”” are wondering what’s up with business since 9-11.

Blaming slower slot machine orders, PDS Gaming Corp. reported last week that its net income plummeted 64 percent in the last quarter. Other sluggish results are expected in the coming weeks.

“It’s not a good market for anyone right now,’’ an industry supplier told GamingToday. “The Indian gaming gravy boat is over and we’re essentially talking about a replacement market. No one is building.’’

“We have to think hard about opening a 30-day account for some companies,’’ said the vendor, who requested anonymity.

Still, there are several bright spots amidst the gloom and doom.

International Game Technology, the No. 1 player in slots, has been on a roll. If IGT posts a profit on April 23, it will mark the seventh straight winning quarter. Analysts expect the firm to earn $3.66 this year, up nicely from $2.80 in 2001.

“The macro environment is certainly in (its) favor,’’ says William Schmitt, gaming analyst at CIBC World Markets, who cites gambling’s increasingly popular role as a budget supplement for cash-hungry states.

Aristocrat, coming off its merger with CDS, is aggressively exploring new markets from New England to Kentucky. And New York is in everyone’s sights as that state considers ordering as many as 30,000 slot machines for its nascent gaming sector.

Charles Laloggia, a former Merrill Lynch analyst and co-author of “The Superstock Investor: Profiting from Wall Street’s Best Undervalued Companies,’’ is betting on racinos to kickstart slots.

“When you go to a racetrack three to five years from now, it’s not just going to be a racetrack; it’s going to be virtually a gambling casino. You’re going to see slot machines, and eventually you’re going to see blackjack, craps, table games,’’ he says.

“Within the next year or two, you may see the big ones like MGM and Harrah’s make bids for some of these companies,’’ Laloggia adds.

Laloggia, who also happens to own thoroughbred racehorses, believes that slot makers can ride racinos to bigger profits. “I think the demand for slot machines has nowhere to go but up for the next few years.’’

IGT, which prospered with Indian casino expansion in California last year, may be getting some keener competition through industry consolidation. WMS Industries is considered an attractive target as a premier video-slot maker that carries no debt and stock that halved in price due to a software glitch.

“There’s a lot of competition out there,’’ acknowledges IGT spokesman Ed Rogich.

Alliance (formerly Bally’s) is widely regarded as having the best intellectual property in the business. And Konami Gaming, a relative newcomer, is rapidly expanding its product line and aggressively challenging the big boys.

But most analysts say the Reno-based IGT is a good bet to maintain its market dominance. IGT re-energized itself by acquiring Anchor Gaming last year and the company is creating new ways to bolster the bottom line ”” even in times of slow growth.

Casinos replace about 20 percent of their floor machines every year, which translates into about 124,000 machines. But, instead of selling its newest technologies and most popular slots to the casinos, IGT is seeking a slice of the revenue. That can be more profitable than product sales because the sales are recurring.

“As that business grows, the stock should appreciate at a higher rate than earnings because of higher-margin cash flows,’’ explains David Barteld, gaming analyst at Wells Fargo Securities, who expects 15 percent earnings growth ­­annually.

Argosy Gaming has been faring well, too. With share prices roughly 10 percent higher than a year ago, Argosy stock was upgraded to a “buy” from Bank of America Securities last week.

Also last week, Alliance announced that its two-for-one stock split will take effect this Wednesday. That comes on the heels of record earnings for the quarter ending December 31.

But other manufacturers have seen their shares slump. The stock price for Innovative Gaming Corp., for example, tumbled from $2 last year to 35 cents on Friday.

How it all shakes out is anyone’s guess. But the consensus seems to be that short-term softness will be followed by a run-up in new business here and elsewhere.

Brandon Knowles, marketing exec for Aristocrat, says Mexico will eventually be ripe for gaming activity. And England’s dingy seaside cities are edging toward casinos. Just last week, the British government unveiled plans for 24-hour, Las Vegas-style gambling at a Blackpool hotel, tentatively named Pharaoh’s Palace, sporting 500 rooms, a 3,000-seat theater ”” and 2,500 slot machines.