Anchor Gaming a Good Bet to Shake Off Casino Industry Blues

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By Alex Berenson
Staff Reporter

Anchor Gaming

(SLOT)

gets no respect. But it should.

Unlike other small-cap casino companies, Anchor has resisted the temptation to overbuild and lard its balance sheet with debt. The company's two Colorado casinos dominate their market, and Anchor has now sold almost 2,000 copies of its proprietary, high-margin Wheel of Gold game.

All that has translated into big profits for the Las Vegas-based company. In its most recent quarter, ended March 31, Anchor reported earnings of $8.6 million, or 63 cents per share, up from $5.5 million, or 46 cents, a year earlier. It posted revenue of $37 million, up from $29 million in the previous year. For the first nine months of its fiscal year, Anchor earned $1.83, up from $1.29 a year earlier. And the company had about $75 million in cash, or more than $5 per share, as of March 31.

Yet in the last nine months, Anchor's stock has dropped like a you-know-what, even by the standards of the troubled gambling sector. Since September, when it peaked at almost 70, Anchor has fallen some 60%; the bellwether

CBOE Gaming Index

is down 17% over that span. Anchor stock closed Tuesday at 26 3/4, up 1/4. At that price, Anchor is selling at just nine times its trailing earnings, after factoring out its cash cushion.

Industry analyst Daniel Davila of

Rodman & Renshaw

says he's at "a loss to explain" why Anchor's shares are so depressed. "The business pieces only get better," Davila says. "What's not to like here?" Rodman has not been a lead underwriter for Anchor.

Anchor's stock began its slide last fall after the company announced it wouldn't be expanding its

Colorado Central Station

casino, located about an hour outside Denver in mountainous Black Hawk, one of three towns where gambling is allowed in Colorado. The railroad-themed Central Station dominates the Black Hawk market because it is the first casino gamblers driving from Denver see and it's more easily accessible than its competitors. In Anchor's latest quarter, it had revenue of $17 million and operating expenses of just $7 million.

But after

Caesar's

, a unit of

ITT

(ITT) - Get Report

, announced plans to enter the Colorado market, Anchor said it would add a costly expansion to Central Station to keep ITT at bay. Then ITT backed off, and Anchor put its expansion on hold. But investors didn't cheer the news that the company would remain basically unchallenged in Colorado without having to invest another $30 million or more in the state. Instead they lamented the end of Anchor's growth story.

A Nov. 12 downgrade by

BT Securities

, which led a 2-million-share secondary offering of Anchor stock in April 1996, didn't help matters, pushing Anchor's stock from 39 to 30 in a single day. (Bankers Trust analyst Thomas Ryan didn't return calls for comment.) Then, on Dec. 4, Anchor hired

Morgan Stanley

to consider a sale or merger of the company, and its stock soared to 50 in mid-December on hopes of a quick buyout. But nothing has happened since, and now Anchor has returned to the doldrums.

But investors who think only a quick sale can save Anchor are missing some salient facts. The company's Wheel of Gold sales more than doubled to $11 million in the latest quarter, and it also has a profitable "route" business servicing video poker machines for supermarkets and other noncasino operators in Nevada.

All in all, Anchor is on track to meet expectations that it will make $2.50 per share for fiscal 1997 ending in June, and analysts predict it will earn north of $3 in fiscal 1998, a 20% year-over-year gain. "The business pieces only get better. The route business is only becoming more profitable," Davila says. With $3 in earnings power on a calendar basis, he says, a reasonable price to pay for the company would be in the mid-40s to mid-50s.

It's hard to fault Davila's logic. But perhaps the company's languishing stock price has something to do with the attitude of Anchor's management. Reached Tuesday afternoon, Anchor Chief Financial Officer Salvatore DiMascio demanded to know why a reporter would write a story about his company and declined to answer questions about Anchor's growth, its stock or anything else

"When we have more news, we'll issue a press release," DiMascio said. Well, could a reporter ask a question not covered in the company's most recent release? No.

Fortunately, the company seems to be better at running casinos than dealing with the media. Now Anchor investors just have to hope the good news gets out despite the company's efforts to stop it.