WMS Is Still Playing Nice

That should continue to be the case. Revenue from Pennsylvania and Florida is just ramping up, new venues in Oklahoma have promise, and new product launches should continue over the next three quarters as well.

There seems to be a particularly strong buzz around WMS' new "transmissive reel" technology, which allows the company to overlay a high-definition-video look to the feel of the five-reel mechanical games that players are accustomed to. WMS also thinks it has a winner in its new Top Gun game, which is like a full surround-sound arcade machine (replete with Bluebird cabinets and Bose speakers), with the added attraction of being able to make you money.

Inside the Numbers

Management is now guiding for $135 to $140 million in third-quarter sales. This raises the bottom end of full-year sales guidance from $525 million to $530 million. With operating margins expected to tick up as well, WMS should have no problem meeting the low end of analysts' full-year EPS expectations of $1.15. The current average EPS expectation for fiscal 2007 (ending June 30) is $1.27. That would represent 35% year-over-year growth if hit. Another 24% EPS increase, to $1.57, is expected in fiscal 2008.

Granted, WMS is now trading for 30 times expected EPS, which isn't cheap. But with most aspects of its business in a solid uptrend, I don't think it's quite time to bail on this firm. For one, the stock's P/E is not outrageous for a gaming firm with the growth WMS is experiencing. The stock is also still cheaper than market leader IGT (IGT Quote). David Bain at Merriman Curhan Ford points out that the company trades for just over eight times his forecasted enterprise value/EBITDA for calender 2008, while IGT's multiple is over 12.

I expect solid double-digit revenue growth to continue in coming quarters and for WMS to trade to the high $40s in the next year on the basis of the growth catalysts (e.g., new products and new gaming jurisdictions) that are already in place.

Adding to my comfort of sticking with WMS, no prospects for Russian sales are built into their expectations. When I introduced the stock nearly a year ago, I had expected a resolution to the Russian legislative issues that were stymieing sales in that promising jurisdiction. That hasn't happened. But the sales void from that failed part of the old investment thesis was quickly filled with sales of new products to existing and other new jurisdictions, showing the depth of opportunity the company had -- and still has. Russia could again be an opportunity a year from now.

Technically, WMS appears to be finishing up a normal bout of consolidation after its January price spurt. So technicians and growth investors alike can find something to justify a purchase. And for all of us who got in early thanks to the insiders' action way back in late 2005, letting this winner ride still appears to be a good bet.