NOW THEY’RE WORRIED ABOUT THE NEAR TERM

The sell side brushed off muted near term outlooks given by the suppliers on their last conference calls and now they are lowering estimates. Stocks are underperforming but do the next few quarters really matter?

 

 

Three issues for Q1 CY2010, the last of which should’ve been expected given the last conference call commentary:

  1. Alabama
  2. Weather – impacts gaming operations
  3. Replacements suck

 

So Goldman Sachs did a survey that indicated casinos were not accelerating replacement buying as much as he thought.  He lowered estimates on the “Big Three” and cut his sector rating and the rating on BYI and IGT.  Other analysts followed suit and cut estimates. 

 

The question we have is what took you so long?  It’s not like these companies were bullish about the near term.  Each management team made cautious comments about the March quarter:  WMS actually gave revenue guidance below the Street but analysts maintained their estimates and IGT was challenged for sandbagging but it's now apparent they were being realistic.  Bullish analysts were apparently blinded by, well, their bullishness.

 

Here are some thoughts about each of the Big Three:

 

IGT:

  • We remain at $0.17 for FQ3 (March) while the Street has come down to $0.20.
  • IGT probably has more exposure to both the Alabama issue and the bad weather.  IGT’s market share in gaming operations is much higher than it is for slot sales so weaker play in the regional markets hurts them more than WMS or BYI.
  • Stock has been pretty weak lately but we still think IGT has company specific issues to contend with.  While their new products are solid, market share remains under pressure (FQ1 was awful) and the company remains over reliant on the “Wheel” games.

 

BYI:

  • We are at $0.61, below the Street at $0.63.
  • Like IGT, BYI will take a hit from Alabama and to a lesser extent, the bad weather.
  • BYI is less reliant on slot sales so they may have a little more cushion.  However, software sales are very difficult to project.
  • At less than 15x our FY2011 (essentially forward 12 months) estimate of $2.68 the stock is beginning to look attractive.  Without a near-term catalyst, however, BYI could continue to trade off.
  • The real story is new markets, the potential for even more new markets (thanks to out of control state governments), and a bounce off trough replacement demand.  We think we are at the bottom of a five year bull cycle in earnings and stocks.

 

WMS:

  • We remain at $0.47 vs. the Street consensus of $0.49.  We have a higher level of conviction in the March quarter for WMS than the other suppliers.
  • Alabama will not affect WMS.
  • WMS has the highest play per participation game of any of the three suppliers so they should be less impacted by the bad weather.
  • We expect WMS replacements in FQ3 to exceed that of FQ2.
  • WMS at $38.36 trades at only 16x our FY2011 estimate.  The stock could get cheaper as earnings expectations continue to fall.  Again, we think earnings will be fine.
  • The real story is new markets, the potential for even more new markets (thanks to out of control state governments), and a bounce off trough replacement demand.  We think we are at the bottom of a five year bull cycle in earnings and stocks.

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