HALF IN THE BAG

I continue to hold a very sober view of 1H CY2009 slot sales. Analysts are forecasting 10% revenue growth for BYI and WMS and positive slot unit sales for the sector over this period. As we wrote about in our 11/02/2008 post, “CAPEX, COVENANTS, AND CORPORATE CONTROL”, slot Capex is likely to drop off dramatically in the first half of next year as CFO’s strive to avoid liquidity crises. In addition to a replacement push back, demand for slots at new casinos will be way down in 1H CY2009. We estimate unit sales to new casinos will be cut in half over that time.

Estimates probably need to be reigned in for all of the suppliers. However, BYI looks to be more protected with almost 50% of its revenue derived from what we would consider “in the bag” sources. WMS is expected to generate only 35% from such sources. No company would be in good shape if slot sales fall to zero in 1H 2009, nor are we predicting they will. There are new casinos opening next year but it is conceivable that replacement demand could get cut in half or even by 75%.

“In the bag” revenue sources include lease and participation revenue (which we’ve discounted given the environment) and deferred revenue. Due to accounting regulations, BYI has deferred a significant amount of revenue. We estimate a little under 20% of projected revenue is derived from deferred revenue versus virtually zero WMS. This provides a nice cushion in a temporary slot slowdown. Both companies should source 30-35% of revenue from participation and lease revenue.

Considering relative valuations and expectations and BYI’s earnings cushion, BYI’s stock may be in better shape to weather a temporary slot drought.