The following is a point-by-point retort:
• New states will expand gaming:
Yes, states are in a downturn and could be looking for new gaming sources. Ohio, New York, Kentucky, and Texas are cited as contenders. Even if any of these states pass gaming legislation next year (unlikely in our opinion), history shows us it will be another 2-3 years before a slot machine is sold.
• Slots are a high IRR purchase:
This is a static argument that sounds like it is coming from a slot salesperson. In a vacuum, a new slot does pay for itself in a couple of months. However, new slots just steal revenue from other slots in the casino. Casinos only buy them because they have to stay competitive with their neighbors. How do I know? Same store slot revenue hasn’t grown in a long time. Moreover, as we discussed in our post, “SLOTS LOSING OUT TO TABLES”, slot handle is on a 5 year decline relative to table drop.
• Tribal gaming, international, and Maryland will drive growth:
Tribal gamers won’t be buying slots any time soon (“TRIBAL GAMING IS SUFFERING TOO”, 11/28/08) and Maryland is probably 3 years away from buying slots. The international argument has been out there for awhile but Asians aren’t embracing slots “ASIAN SLOTS: SELLING HAGGIS TO VEGANS”. Where else is gaming expanding?
• Replacement sales should start to turn in 2010:
OK, I’ll give you this one, only because 2009 is going to be horrible. Estimates don’t seem to reflect this yet.
• Viewing slots as a derivative way to play an improving consumer without the balance sheet risk:
I don’t know what the macro guys are projecting at Goldman but we don’t see an improving consumer for quite some time. Gaming technology companies do have strong balance sheets.
• Low historic and relative valuation levels:
Mid-single digit free cash flow yields don’t make a value guy like me want to run out and buy the sector.
I will say that BYI and IGT do look cheap on P/E and EV/EBITDA metrics while WMS continues to look expensive. Consensus estimates need to come down for the whole space in my opinion. Maybe that will be the catalyst to look at the space for a 2010 turnaround.