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Forget Poker: Here’s Your Best Bet in Casinos
| Company Name |
Price
Earnings Ratio* |
PEG** |
Price to
Sales Ratio |
Projected
Growth*** |
Projected
Earnings* |
Recent
Price |
| WMS Industries (WMS) |
20.2 |
1 |
1.6 |
20% |
$1.14 |
$23.00 |
| International Game Technology (IGT) |
22.4 |
1.5 |
3.9 |
15% |
$1.24 |
$27.80 |
| Alliance Gaming (AGI) |
27 |
1.6 |
1.2 |
17% |
$0.43 |
$11.60 |
Since last summer, investors have thrown in their hands on gaming stocks.
They’re spooked by worries about the consumer, Hurricane Katrina, and a lull
in the expansion of jurisdictions in the U.S. that allow gambling – which is
probably only temporary.
All of this means gaming stocks are down sharply since last summer when many
enjoyed their highs for the year.
One hit the hardest is WMS Industries (WMS),
a company that supplies slot machines and other gaming devices. By early
November, it had sunk to nearly $20 from above $35 just last July.
After this 43% tumble an impressive array of insiders -- including chief
executive Brian Gamache, four directors, the controller, and a vice
president -- stepped up to buy a healthy dose of the stock in the $21 to $23
range.
They purchased about $1 million worth, a remarkable amount for such a small
company.
Since then, the stock has recovered to trade recently for about $23. But it
still looks cheap relative to both peers and its growth rate (see chart), so
I’d still buy it right here.
After all, the popularity of gambling isn’t on the wane. And while the
momentum on new approvals has slipped recently in parts of the U.S. like
Pennsylvania, Florida, Mississippi, Louisiana, and also in Russia, there is
still plenty of room for growth. After all, the U.S. has commercial gaming
in just eleven states. “We believe jurisdictional expansion is inevitable,
as acceptability of this 'vice' continues to grow,” says Dori Prowda, an
analyst at Wachovia. Besides, state governments need the tax revenue.
Between now and then – more jurisdictions are expected to open up in a big
way until late 2006 or 2007 – WMS Industries should grow faster than its
peers. But it is also cheaper by at least two valuation metrics (see chart).
This suggests you’d be smart to follow the insiders and buy some shares now.
Here’s why.
* WMS Industries got hit hard when JP Morgan (JPM)
and other analysts downgraded the stock in early November. That’s when
insiders stepped up and bought. I like this combo – analysts scaring
investors out of a stock while insiders buy – because studies show the
insiders prevail more often than not.
* Demand for WMS Industries gaming machines remains healthy. The company has
a solid backlog of about 10,500 devices. “That gives us decent visibility
into the future,” WMS finance chief Scott Schweinfurth told me in an
interview this week. WMS Industries was late to introduce popular “wide area
progressives” – or games that pool the action from several units into a
larger jackpot. So the company is growing faster now, as it plays catch up.
“We are at a different stage of the cycle,” says Schweinfurth.
* WMS has decent new products on the way and it will be taking business from
peers, say analysts. “WMS is a better positioned gaming manufacturer as it
continues to steal market share from its competitors,” says Legg Mason
analyst Steven Wieczynski. “We believe that WMS will be able to ‘weather the
storm’ much better than the rest of its peers until late 2006 or 2007 when
we should start to see new market openings.”
The bottom line: Gaming stocks are a bit out of favor. But the urge to
gamble isn’t going away. And neither is the government hunger for tax
revenue from gaming. There just seems to be a lull in approval of new
jurisdictions, among other challenges. So the investing crowd is headed
elsewhere. These are often the best times to move into neglected names –
especially when insiders are doing exactly the same thing in a big way.
*Forward twelve months
**Forward p/e divided by projected medium term earnings growth rate
***Projected annual medium-term earnings growth, consensus forecasts
Source: Thomson Financial
Disclaimer
At the time of publication, Michael Brush did not own or control shares in
any of the companies listed in this column. Mr. Brush is an independent
columnist for this web site.
For more on Insiders Corner disclosure, see the disclosure section in About
Insiders Corner:
http://www.investorideas.com/insiderscorner/. InvestorIdeas.com
Disclaimer:
www.InvestorIdeas.com/About/Disclaimer.asp. InvestorIdeas is not
affiliated or compensated by the companies mentioned in this article.
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