SLOTHY GROWTH

10/03/13 10:41AM EDT

What can slow the mo in slots? The better question is what will keep it going.  Taking IGT off the best ideas list.

Competition among the slot suppliers is as fierce as I’ve seen in covering the space for 17 years.  Smaller players are gaining, ASP growth has slowed, and product quality has improved dramatically.  At the same time, replacement demand is stagnating again, the number of new casinos and expansions will be lower in 2014, and the differentiation between the best and average performing gaming is narrowing.  The base of slots in existing markets continues to decline.  I don’t want to use the word commodity but operator cries over the past 15 years that “the product is the building and service, not the slots” may finally be relevant.

Has anyone noticed the worsening economics of the once vaunted participation business?  We have.  Incremental ROI is near nil for this segment.  Most of the CapEx appears to be more maintenance related than ever before.  IGT is clearly the most susceptible here.

And we haven’t even gotten to the pink elephant in the room – demographics.  Baby Boomers won’t live forever.  Younger generations are not playing slot machines!  Generation X – my generation – the product of the divorce boom and the first video game generation, do not play slots.  Oh, how I miss late night Space Invaders on my Atari when my parents were asleep.  If Generation X won’t play slots, can we really expect the younger generations – even more obsessed with skill-based video games – to turn to machines with randomly generated outcomes for entertainment?

So who is at risk?  The stocks IGT, BYI, and SGMS for similar and different reasons could be under pressure in the coming year.  In fact, we are taking IGT off the Hedgeye Best Ideas list today. 

We’ll have more analysis and details on the slots soon.  Stay tuned.

© 2024 Hedgeye Risk Management, LLC. The information contained herein is the property of Hedgeye, which reserves all rights thereto. Redistribution of any part of this information is prohibited without the express written consent of Hedgeye. Hedgeye is not responsible for any errors in or omissions to this information, or for any consequences that may result from the use of this information.