(Gaming technology article updated from Feb. 9)
NEW YORK (
) -- Weakness in the gaming equipment sector could well represent a buying opportunity for investors.
Since the big three slot makers --
International Game Technologies
-- reported their quarterly results, shares have fallen significantly from their January highs, J.P. Morgan analyst Joseph Greff wrote in a note.
IGT is down 14.9%, Bally is off 18.5% and WMS has dropped16%. But ultimately, Greff says, nothing has fundamentally changed with any of these companies since three months ago.
In comparison, their casino-operator peers are outperforming the market, with
Las Vegas Sands
up 4% for the year-to-date period,
growing 4.3% and
Greff attributes this underperformance for the gaming technology companies to profit taking following the companies' strong 12-month price performance, concerns about near-term slot visibility, not enough near-term upside in their 2010 outlooks, soft regional gaming fourth-quarter results and some jurisdictional risks.
Concerns for IGT, for one, predominantly stem from weakness in the regional gaming market, where 60% to 65% of the company's earnings come from.
As for Bally, investors were disappointed when it reported second-quarter revenue that fell short of expectations and issued an outlook that could fall short of Wall Street's forecast.
Still, all three companies delivered margin improvement in what was a revenue-challenged quarter -- which is what analysts were looking for. "We think this improvement in margins will manifest itself in strong operating leverage gains once revenues accelerate," Greff wrote.
Greff adds that this stock price decline "presents an opportunity in front of revenue acceleration starting in the calendar of the second quarter of 2010." And while these companies are poised for growth over the next two years, they are cheaper than Macau and Las Vegas strip operators.
The executives of WMS, for its part, told
that there is significant opportunity in Australia, one of the largest gaming markets in the world. WMS is waiting for regulatory approval to enter the market.
WMS is also focused on Illinois, which is moving forward on gaining approval for its tenth casino.
Following Greff's report, WMS was upgraded on Wednesday by Brean Murray to buy with a price target of $51.
"With the potential for WMS's participation base to increase following flattish results over the past two quarters and with the most leverage to industry replacement sales, which should dominate the sales landscape for the next few quarters, we view the recent 20% slide in WMS shares as a compelling investment opportunity."
With regards to IGT, Greff says the company is a way to play the pickup in replacement and new jurisdictional opportunities, while getting a turnaround story as well.
"We believe the suppliers represent the better, more defensible, business models with respect to return on investment capital," Greff wrote. "While patience may be required, we think the window here is roughly three months. We believe investors should be in front of what we expect will be an incremental upturn in casino operator slot
spending in the second quarter of 2010."
Greff has an overweight rating on all three of the gaming equipment stocks.
Shares of IGT are rising 1.4% to $17.81, WMS is up 2.2% to $37.76 and Bally is increasing 2.1% to $38.76.
-- Reported by Jeanine Poggi in New York.
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