5 Casino Services Stocks to Play

NEW YORK (TheStreet) - Shuffle Master (SHFL), Bally Technologies (BYI), WMS Industries (WMS), Gaming Partners International (GPIC) and Entertainment Gaming Asia (EGT) are five casino services stocks with up to 40% upside, according to analysts' 12-month price targets.

These companies provide gaming equipment and products to casinos, hotels and resorts. The products supplied are both non-consumable and consumable. Non-consumable products such as gaming chips, gaming furniture, and table accessories have a useful life of several years. Consumable products such as table layouts, cards, and dice represent recurring revenue for the companies.

Revenue growth for these companies depends on the spending plans of casino operators and new casino openings. However, the economic slowdown in the US has taken its toll on casinos. To offset this downturn, casino operators are looking for lucrative growth avenues, especially the Pan-Asian markets (Macau and Singapore).

Casino revenue in Macau, the world's biggest gaming market, rose 48% in March to $2.51 billion, the Macau government revealed recently. Growth comes on the back of a solid 2010, during which Macau witnessed 65% year-over-year growth, beating analyst forecast. Aaron Fischer, head of Asian consumer & gaming research at CLSA Asia Pacific Markets, has recommended a buy on the sector as he expects a growth of 25%-30% during the next two years.

Singapore, on the other hand is witnessing tremendous growth within just one year of the government opening the region to the gaming industry. According to a report from PricewaterhouseCoopers, Singapore is set to overtake South Korea and Australia this year, to become the second-largest Asia-Pacific casino market. PwC estimates Singapore's casino gaming market at $2.8 billion in 2010, which is forecast to grow to $5.5 billion in 2011 and $8.3 billion by 2014.

5. Shuffle Master supplies entertainment-based products for the gaming industry in four distinct categories: Utility products, Proprietary Table Games (PTG), Electronic Table Systems (ETS) and Electronic Gaming Machines (EGM).

For the latest first quarter ended Jan. 2011, the company reported total revenue of $43.8 million, up 8.6% year-on-year, largely attributable to a 24% and 33.7% revenue increase from proprietary table games and electronic gaming machines, respectively. Gross margin increased 500 basis points to 66.6%, while operating margin expanded 240 basis points to 16.1%. As a result, net income surged 30.6% to $4.8 million or 9 cents per share, compared to $3.7 million or 7 cents per share in the year-ago quarter. Analysts had estimated earnings of 8 cents per share.

The company achieved strong growth in all the product categories. Lease installed base of 7,344 shufflers increased 28% year-over-year at an average monthly lease of $454. Chipper units lease stood at 190 compared to 35 in the year-ago quarter. In the PTG segment, the company recorded a lease base of 5,237 units, 15.6% year-over-year increase. The company sold 13 units at an average price of $63,154, compared to the average price of $12,500 for 2 units sold during the first quarter of 2010.

ETS lease increased 12.6% to 2,583, while sold seats declined to 173 from 178. However, average selling price rose 6% to $22,688 from $21,410. Total EGM sales stood at 323, up 48.2% from 218, while average selling price increased 19.8% to $18,997.

Going forward, analysts expect the company to report earnings of 14 cents per share in the second quarter and 55 cents for the year ending 2011.

Of the nine analysts covering the stock, 67% recommend a buy, while the remaining rate a hold. There are no sell ratings on the stock. On average, analysts estimate an upside of 17% to $12.96 in value from current levels. The stock was recently upgraded to overweight from hold at EVA Dimensions LLC.

4. Bally Technologies designs, manufactures, operates, and distributes advanced technology-based gaming devices and systems worldwide. Bally's product line includes reel-spinning slot machines, video slot machines, wide-area progressives, and Class II, lottery, and central determination games and platforms.

For second quarter of 2011, total revenue was $182.7 million. Gaming operations contributed $77.1 million to total revenue, the highest ever achieved. Moreover, average selling price of new units increased by 7% to $15,244, driven by sales of its pro-series with Alpha 2 technology. At the end of Dec. 2010, gaming monitoring units installed base stood at 392,000 and systems managed cashless games stood at 327,000, representing a year-on-year increase of 7.4% and 4.5%, respectively.

The company recently announced plans to acquire Sightline Payments, a provider of innovative payment solutions. The strategic investment would enable Bally to launch cashless gaming products which it believes can change the gaming payments industry. Bally also announced DRGT Europe as its distributor for slot machines and related equipment in Belgium.

Going forward, the company expects improvement in replacement demand as well as jurisdictional expansions during 2011. Furthermore, Bally forecasts diluted EPS of $2-$2.15 on annual revenue of $205-$215 million.

Of the nineteen analysts covering the stock, 68% recommend a buy and 26% rate it a hold. On average, analysts estimate an upside of 25% to $46.63 in value from current levels.

3. WMS Industries serves the gaming industry worldwide by designing, manufacturing and marketing games, video and mechanical reel-spinning gaming machines, video lottery terminals and gaming operations at legal gaming venues.

Net revenue for 2011 second quarter was increased 5.8% year-over-year to $199.9 million, driven by a 12% increase in product sales revenues to $127.2 million. A 1.4% decline in global new unit shipments was more than offset by an 8% increase in the average selling price, reflecting strong customer demand for premium-featured Bluebird 2 and Bluebird xD gaming machines and higher sales of used gaming machines. Net income increased marginally to $27 million or 46 cents per share from $26.5 million or 44 cents per share in the year-ago quarter.

During 2010, the company expanded by launching directly into Class II gaming markets in the United States and entering the Mexican and New South Wales, Australia markets. The company had previously served these markets through third-party content licensing agreements for its game themes. The company expects to further penetrate these new markets and expand its distribution channels in 2011.

Going forward, the company forecasts revenue of $209-$215 million for the third quarter of 2011, representing 6%-9% growth over the comparable prior year quarter. In addition, the company reiterated its full year 2011 revenue guidance of $830-$850 million, implying 8%-11% growth over the prior year.

Of the twenty analysts covering the stock, 70% recommend a buy, while 25% rate a hold. On average, analysts estimate an upside of 39% to $49.88 in value from current levels.

2. Gaming Partners International is a manufacturer and supplier of casino table equipment. Its products include gaming chips, table layouts, playing cards, gaming furniture and table accessories, dice, radio frequency identification device (RFID) readers and software, and roulette wheels. The stock has gained 13% during the past one year, while it trades at a PE of 12.79, the lowest in the pack.

During the year ended Dec. 2010, total revenue grew 20.9% to $59.9 million from $49.5 million a year earlier, driven by higher segmental revenues. Revenue from sale of casino chips, which contributed 65% to total revenue, increased 20% to $39 million, while revenue from table accessories and other products, and gaming furniture rose 43.7% and 61.8%, respectively. Net income soared to $4.4 million or 53 cents per share, compared to $1 million or 13 cents per share in 2009.

Geographically, revenue from the US increased 32.5% to $30 million, while revenue from Asia, comprising of Macau and Singapore, increased 10% to $22.5 million. Furthermore, cash and cash equivalents surged to $11.4 million from $3.2 million.

At Dec. 31, 2010, the company's backlog of signed orders for 2011 stood at $17.0 million, with $14.1 million generated from Europe and Asia and the remaining from the US. As of Dec. 31, 2009, the backlog for 2010 was $11.8 million, consisting of $8.9 million from Europe and Asia and $2.9 million from the US.

The company formed its subsidiary GPI Asia in Dec. 2010, through which it intends to market its products in the Asian casino market. Later in 2011, the company plans to launch production of products, currently manufactured in France and Mexico, in Macau.

1. Entertainment Gaming Asia contracts with venue owners or operators of resorts, hotels and casinos for placing Electronic Gaming Machines (EGMs) on a revenue sharing basis and directly acquire and install the EGMs and other gaming peripherals at relevant gaming venues. As of Dec. 31, 2010, the company had 2,039 EGM seats with 492 held in inventory and 1,547 in operation. The stock has gained 40% during the past one year.

The company currently has customers in Macau, Melbourne, Perth and Sydney. Its major competitor for gaming chips and plaques is Gaming Partners International.

During the year ended 2010, total revenue surged 42% to $22.2 million from $15.6 million a year earlier, attributable to higher revenue from the Electronic Gaming Machine (EGM) segment. EGM revenue more than doubled to $14.3 million from $7 million, driven by a 19% increase in seats in operations coupled with a 31% increase in average net win per unit per day. Moreover, revenue from non-gaming products increased 61% to $6.6 million, whereas table game products' revenue declined 71% to $1.3 million.

The company reported a gross margin of 29% for 2010 as opposed to a negative margin of 14%. Subsequently, net loss narrowed to $5.2 million or 5 cents per share, compared to $26 million or 23 cents per share a year ago. Cash and cash equivalents more than doubled to $10.2 million from $4.2 million at the end of Dec. 2009.

During May 2010, the company bagged a license to open a casino hotel in the Takeo province of Cambodia. As part of its growth strategy, the company plans to operate regional casinos under the Dreamworld brand focusing on selected Pan-Asian emerging gaming markets.

>>To see these stocks in action, visit the 5 Casino Services Stocks to Play portfolio on Stockpickr.

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