We often hear that the $40 billion spent on video games worldwide dwarfs the amount spent on the motion picture industry. But another form of mass entertainment dwarfs them both: the lottery business. According to a Morgan Stanley study, sales of lottery tickets around the world will top $160 billion in 2004. You should be thankful for the lottery business this week as you write a check for your tax bill. That's because you'd probably owe a lot more if not for your fellow citizens' crazed desire to get rich quick. Forty states and the District of Columbia currently sponsor lotteries to raise money for everything from old-age homes and kindergartens to veterans' services and state parks. Six more states that have resisted so far are edging closer to entering the game. Experts expect that by the end of this decade, just two states will not have a lottery: Nevada, where the casino lobby will block it until Doomsday; and Utah, where the anti-gambling Mormon church holds sway. For investors, the curious thing about the lottery business is that once you peel back the glossy governmental layer, it's virtually a duopoly. Practically all of the games in this country are managed directly or indirectly by just two companies: Rhode Island-based GTech Holdings ( GTK) and New York-based Scientific Games ( SGMS). And it's even more curious that these two mid-cap companies, while not extraordinarily cheap at the moment, aren't really expensive either. Each sports a forward price-to-earnings multiple of around 20. For GTech, the larger of the two, that's only about half again as big a multiple as its estimated 12% to 15% growth rate. For Scientific, it's considerably less than its estimated growth of 20% to 35%.
An Industry You Can Bank On
It doesn't take the hyperactive imagination of a weekly Lotto punter to figure out that an investment in either of these two companies is a lot smarter than playing the numbers. If you believe the growth estimates, which might actually be a little low, you should be able to earn 20% to 25% annually on Scientific Games over the next few years.