Investors have embraced the idea that 2010 replacements will accelerate. That may happen materially, modestly, or not at all. What will happen is slot sales to new/expanded casinos will be down big time.
We are optimistic about a potential acceleration in 2010 North American replacement demand. The industry is going to need it. Our database of new and expanded casinos shows that slot sales into these properties will decline 33% in 2010. Since both replacements and new/expansion slots should each total around 35,000 units this year, replacements need to grow more than 33% for industry unit sales to increase next year.
Replacements are a wild card while new/expansions are fairly predictable and easy to calculate, if one does the work. We do and we can say that 2010 will be choppy with positive growth by no means certain. Challenge your favorite analyst to back up his/her 2010 growth slot forecast. On a quarterly basis, Q1 2010 will be the ugliest with new/expanded units down almost 70%. The only growth quarter will be Q3, up 93%. We project Q2 and Q4 to decline 21% and 49%, respectively.
We don’t want to sound overly negative. The space looks attractive long term given the normalization of replacement demand and the likelihood of significant growth in new markets. Coming out of G2E, the sentiment was pretty positive (new markets, content) but we just want investors to be aware of the potential for some choppy results and earnings misses. IGT could be at particular risk given its reliance on slot sales and a plethora of new “wheel” products from BYI. We are less concerned with BYI’s earnings visibility due to a significant amount of deferred revenue, continued market share gains in systems, and the company’s ability to manage earnings.
