Is It Time to Place Bets on the Gambling Supply Chain?

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Four years into the economic recovery, Las Vegas and its casino operators continue to deal with the effects of their pre-crisis, excessive building activities, as well as a slower stream of travelers into Sin City.  In contrast, the global gambling business seems to be on a more solid growth path, as international locations like Macau and Singapore pick up the slack.  Meanwhile, domestic areas outside Vegas have also caught the gambling bug, with places like Massachusetts, Pennsylvania, and Ohio putting up new casinos.  The increase in the number of gambling destinations doesn’t help Vegas, but it is bringing more business to the industry’s equipment suppliers.  So, which companies are worth a look?

Small, but nimble

Multimedia Games (NASDAQ: MGAM) has been one of the segment’s top stock performers of the past five years, as it diversified its revenue base and continued to create popular games for its slot machines.  While the Chickasaw Nation of Oklahoma still accounts for 30% of its overall revenues, the company has built a meaningful scale of operations in newer gambling centers, including Washington, Michigan, and California.  One of Multimedia’s keys to success has been innovative games, like its TournEvent multi-player slot game that has been installed in 100 of its customer locations.  Multimedia is planning regional cash tournaments around its TournEvent game, in a bid to extend its brand name recognition to gamblers around the country.

In FY2013, Multimedia has posted strong financial results, with increases in revenues and operating income of 22.3% and 142.4%, respectively, versus the prior year period.  The company’s sales growth has benefited from gains in its installed machine base, as well as its winning selection as the operator of New York State’s racetrack slot machine system.  In addition, the popularity of Multimedia’s TournEvent game platform has lowered the need for heavy marketing expenditures, enhancing the company’s overall profitability.

Another of the industry’s strong small cap performers has been SHFL Entertainment (NASDAQ: SHFL), a diverse supplier of automatic shufflers, table games, and electronic gaming systems.  The company is a leading provider of card shufflers, with over 8,000 units in use around the world.  Unlike Multimedia Games’ domestic focus, SHFL has positioned itself for future international expansion, with Australia and Asia currently accounting for almost half of its total revenues.

In FY2013, SHFL has posted mixed financial results, with increases in revenues and operating income of 11.5% and 3.2%, respectively, compared to the prior year period.  While the company has enjoyed strong sales in its shuffler and table games segments, it has been hurt by declines in its electronic table game unit.  The increase in the number of live casino facilities, especially in the U.S., has lowered the popularity of racetracks’ electronic table games, reducing SHFL’s share of revenues.  On the upside, the company sees opportunities to deploy its underused machines in international markets that don’t have access to large casino facilities.

A possible consolidator

Both of these companies may be on the radar of a larger competitor, like Bally Technologies (NYSE: BYI), looking to gain market share in select areas.  The company is a large player in the gambling systems management business, with roughly 435,000 slot machines connected to its network around the world.  Bally uses its systems unit to drive incremental equipment sales, which has led to a current installed base of nearly 15,000 slot machines globally.

In FY2013, Bally has reinvigorated its growth trajectory, with increases in revenues and operating income of 15.6% and 30.8%, respectively, versus the prior year period.  The company achieved double-digit sales gains across its business units, led by a 17% jump in equipment sales.  The convergence of slot machines and server-based networks plays into Bally’s technology expertise, exemplified by its Cash Connection networked game product that enjoyed record unit sales during the period.

The bottom line

As casinos look to remain efficient and attract new customers with the latest high-tech equipment, they are looking to their favored equipment suppliers capable of operating anywhere around the globe.  These three gambling equipment suppliers are expanding their industry market share with innovative products and should be able to drive higher profits for investors, assuming continued growth for the global gambling industry.  While spending time in a casino is generally a bad investment move, buying these suppliers could be a good bet for investors’ portfolios.

Robert Hanley has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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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