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Will WMS Get a Monopoly on the Slot Machine Business?

In the business of building slot machines, WMS Industries (WMS) - Get Advanced Drainage Systems Inc. Report has been the losing bet against International Game Technology (IGT) - Get International Game Technology Report and Anchor Gaming (SLOT) .

When its

Midway Games


home-video-game unit was spun off earlier this year, most investors opted for the spinoff rather than the so-called stub known as WMS, which also makes video lottery games and pinball machines. Midway had several hot games, including

Mortal Kombat

. WMS, on the other hand, had little visibility -- especially in the potentially superhot casino segment, where it had lost a crucial patent lawsuit brought by IGT. As recently as two months ago its stock was trading at 4.

But while Wall Street wasn't watching, WMS used the downtime to retool itself and design around the patents. Judging by its stock, which closed yesterday at 6 15/16, it appears to be beating the odds.

Several WMS slots introduced this year have been hits. But none has generated the buzz like WMS' new


game. Introduced just six weeks ago, this "game within a game" has won rave reviews. And based on early results, it may be the hottest new slot since the joint introduction by IGT and Anchor several years ago of

Wheel of Fortune


Bear Stearns

analyst Jason Ader, who has no relationship with WMS and isn't currently recommending its stock, interviewed officials from 26 of the country's top casinos for a report scheduled for release in conjunction with next week's

World Gaming Congress & Expo

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in Las Vegas. "Everyone's talking about


," he says. He adds that so far, some casinos expect


to do better than

Wheel of Fortune

and several other recent winners.

The various versions of the


game works like any other slot that dispenses coins, with one exception: After a number of plays the machine also incorporates features, as a bonus, from the familiar


board game.


Wheel of Fortune

did for IGT and Anchor, however, the real attraction of


is that it has the power to create an annuity of sorts for WMS. Rather than selling the slots outright, at a price of around $6,500 apiece, the company shares in the game's profits by receiving roughly 20% of the take. The average slot grosses around $100 per day.

It's hard to say how


will eventually do. There are currently only 12 machines in four casinos. But early results lead David Ehlers, chairman of

Las Vegas Investment Advisors

, to suggest that


may do on average as much as $450 per day. That would translate into $32,850 per year, or earnings per share of 42 cents per 1,000 machines. (This year WMS is expected to earn 5 cents per share.)

As a benchmark, consider that currently there are roughly 6,000

Wheel of Fortunes

installed. Even with a portion of that, "It doesn't require an accountant, or an investment analyst, to figure out that


may impact WMS substantially," says Ehlers, who is just as likely to be short gaming stocks. WMS is currently his favorite stock to own.

The gaming industry in general has been in the investment swamp lately, due in large part to overcapacity in Las Vegas. But that overcapacity should actually work in favor of WMS because casinos will need to make sure they have a mix of the best games.

Ehlers doesn't expect earnings from


to really start to kick in until the post-Christmas quarter. The obvious question, however, is whether a game that gets off to such a fast start can fizzle. The obvious answer: absolutely.

"If customers lose a lot of money on it you're going to die," says WMS Chief Operating Officer Kevin Verner. To avoid such a fate, he says


has high "hit frequencies" and frequent bonuses.

Ehlers, meanwhile, says his staff's own daily checks at the same casinos at the same time every day show no letup in demand for


. He says he checked his old notes and "there's every bit as much enthusiasm" for


as there was for

Wheel of Fortune

. "All machines are a gamble," says Ehlers of Las Vegas Investment Advisors. "The ones that do the best are those that can entertain you while you're losing money. And if they can make you laugh, well, WMS is the first that has done that."

If Ehlers is right, WMS will be laughing all the way to the bank.

Herb Greenberg writes daily for

. In keeping with the editorial policy of


, he does not own or short individual stocks. He also does not invest in hedge funds or any other private investment partnership. He welcomes your feedback at Greenberg also writes the monthly "Against the Grain" column for