Take a Spin With IGT

Lawrance is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

The lights, the sounds, the sense of anticipation. Since a casino opened nearby a few years back, I've become fascinated with the economics of the gaming industry. I see the packed floors and watch as people sit for hours in front of the slots, eagerly sliding $20 bills into the hungry machines. As their stake dwindles before their eyes, they reach into their pockets and do it again. Now, that's a winning business model.

In Any Gold Rush, Look to Make Money With the 'Picks and Shovels'

Companies that run casinos vary in quality, but, to me, most are too debt-ridden to analyze with any measure of confidence or their stocks seem fully priced. Fortunately, there's a whole other category of companies that offers a more compelling investment: the suppliers to the industry.

A few publicly traded companies dominate the market for slot machines: Bally Technologies (NYSE: BYI), International Game Technology (NYSE: IGT) and WMS Industries (NYSE: WMS).

All three companies have suffered since the worldwide financial crisis hit five years ago, slashing the discretionary spending that keeps their profit reels spinning. However, the industry outlook is looking up, as legalized gambling rapidly spreads to more U.S. states and to more parts of the world. In addition, any economic recovery that (temporarily) puts more money into gamblers' pockets is certain to benefit the makers of these machines.

With that in mind, let's take a look at some of the fundamentals:

<img src="/media/images/user_14829/gamingequipsupplier_large.GIF" />

From the data, it appears that WMS is the least investable of the three companies right now and, indeed, that is my take. WMS is still trying to recover from a disappointing earnings report and analyst downgrades from earlier in the year.

On the other hand, Bally and IGT seem well-positioned for any recovery in the sector.

Bally is well-priced currently and has been buying back its stock, indicating that management believes its shares may offer good value at current levels. Its stock has been consolidating in a trading range for nearly a year, so any good news should propel it nicely higher.

The Best in the Business

My favorite, though, is IGT, the largest company in the sector. I'm a bottom-up investor who likes a combination of value, growth and income. IGT takes the pot on all three measures.

IGT's P/S and forward P/E ratios are compelling, especially as the company is pushing hard to expand beyond its traditional domestic base into international markets. It also sports a 2 percent dividend yield, which is well-covered, though its debt load is higher than I would prefer.

Now, the stock got pummeled after a poor earnings report in July, but answered with a strong report three months later. It's been on the rise ever since, indicating very good price momentum. In fact, the July plunge ended up representing nothing more than an excellent entry point. I also like the fact that two company directors made substantial purchases of IGT stock in November.

The Bottom Line

I'm bullish on the gaming industry in general. People love to gamble, and governments around the world, desperate for a piece of the house's take, increasingly have stopped standing in between a person's money and his desire to lose it on games of chance.

Over the long run, I expect all three of these gaming equipment stocks to do well. It's just that, at this moment, IGT is my favorite bet.

lbinda has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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