The gaming industry has been hit hard in recent months. And common sense dictates that until Americans resume spending and traveling as they did before last month's terrorist attacks, these stocks will continue to suffer. Nevertheless, there is at least one sell-side research team -- at Deutsche Banc Alex. Brown -- that says there is a good way to play the group: invest in equipment stocks.
Mark Mutkoski and Joel Simkins, who head up Deutsche Banc's gaming team, cover a host of gaming stocks from
-- both of which they rate buy.
And despite the near-term economic uncertainty, they say traditional casino stocks still offer substantial upside potential. But after speaking with these folks on several occasions and poring over their research, it's easy to see that they have a particular affection for equipment stocks. Those are the companies that make the slots and a variety of other coin-operated gaming machines found on the casino floor. Companies such as
International Game Technology
Why is Deutsche Banc so keen on equipment stocks?
Because demographics and location aren't as much of a concern for the game makers as they are for casinos. After all, WMS and IGT sell their wares to companies in Las Vegas, the Gulf Coast, Atlantic City, and a number of other venues throughout the world. Because of their broad customer base, they're not overly dependent on a particular venue or region as a source of revenue.
But why invest in the group now?
After visiting the inaugural Global Gaming Expo in Las Vegas earlier this month and talking to a variety of company execs, Mutkoski and Simkins concluded that although some of the big operators like MGM Mirage and Park Place will likely scale back their gaming expenditures (for the next few quarters), demand from more regional players such as
Isle of Capri
remain true. Given the doom and gloom most of the sell-side analysts had predicted, this is simply terrific news.
And for those who think equipment stocks aren't quite as alluring as their casino counterparts, think again. Mutkoski and Simkins believe that IGT and WMS can grow earnings by 15% and 20%, respectively, for the next three to five years. Contrast this to say a
which, according to consensus estimates compiled by Yahoo! Finance, is expected to grow earnings at a 12% clip for the next five years.
That suggests savvy investors should consider the equipment makers. Their diverse revenue base and potential for earnings growth suggests that they may be getting an awful lot of attention over the next few years.
Deutsche Banc has had a banking relationship with Harrah's, Park Place and MGM Mirage within the past three years. Deutsche Banc rates Isle of Capri market perform and Argosy buy.
In keeping with TSC's editorial policy, Glenn Curtis doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. Curtis welcomes your feedback and invites you to send it to