I struggle with the timing on this one. WMS is probably best positioned to capitalize on the tremendous long-term potential of this sector but there is a wall of worry surrounding the near term.
From a fundamental perspective, the long-term outlook for the slot guys is bordering on incredible. We think we are at the bottom of a multi-year (five?) cycle. Not only should replacements trough this year in the mid 40k range – down from the peak of around 120k in 2004 - but new markets will start to contribute meaningfully in 2011 and beyond. Normalizing replacement demand would alone boost WMS’s EPS by around 50%. The news on new markets should continue to flow. The states have never been in worse fiscal shape and precedent says they aren’t cutting spending. They need revenues.
However, what's on investor's minds currently is the near-term earnings picture. Maybe it’s in the stocks. As of late, this group has badly underperformed. We actually think WMS will make the quarter, although it may not be of the highest quality. At this point, that could be good enough. The stock trades at 17x our forward twelve month estimate, despite potential 25% EPS growth over a 3-5 year period. The current valuation is attractive on a historical basis as well as can be seen below.
So what could go wrong? It’s all about timing. For this reason I brought in the quantitative/charting specialist, Keith McCullough. Keith says “WMS is building a base and finally climbing above its TRADE line = 38.37”. Sounds good. As long as the wall of worry doesn’t go any higher we should be fine.
So why WMS over the other guys:
- WMS is capturing an increasing percentage of replacement demand which is poised to accelerate – normalizing replacements results in a 50% increase to EPS
- WMS is the most forward looking supplier – "Transmissive Reels", Episodic gaming, portal applications, player recognition, etc.
- We think WMS is just scratching the surface on market share gains in the Gaming Ops segment which is potentially a bigger and more profitable opportunity than ship share gains
- WMS is entering Class II which is already material for IGT and BYI
- There are more new markets for WMS: Mexico and Australia to name the two biggest
- Chicks dig WMS slots - Content is King
