BYI: LOW EXPECTATIONS MAY BE PRICED IN

FQ4 was likely not a great quarter but expectations are pretty low and 2011 ship share should improve from the depths of FQ3.

 

 

When BYI reports its FQ4 results, EPS may come in at the lower end of its guidance range and perhaps a slightly below current consensus estimates.  We’re also a touch below the street for FY2011 given likely delays in IL, NY, and potentially Italy.  However, a small miss off of consensus should be no surprise and likely good enough with the stock down 25% from its 52 week high and only 3% above its low of the year.

 

BYI is at a potential inflection point, given their recent ship share losses coupled with the very recent launches of its new Pro Series Alpha II cabinet and Cash Spin product.  We view fiscal 2011 as a make or break period for BYI.  The next few quarters (beyond FQ4) will either prove out the bear thesis that ship share is heading to low double digits or validate the bull thesis that ship share will recover with the new cabinet and product launches.

 

As shown below, BYI’s ship share has taken a clear share hit since averaging 21% in 2008.  In 2009, BYI’s share slipped to 18% and most recently to 14% in the March quarter.  While 21% share is probably too high, we do think that BYI’s share will rebound to the high teens by the December quarter for two reasons.  First, customers have likely been postponing BYI purchases during the last two quarters while BYI readies its new Alpha Series cabinet for release.  In addition, a significant number of game titles will become available for the new platform in the September and December quarters which should facilitate sales momentum for the new cabinet.  Second, it appears that Konami was at least partly responsible for BYI’s March share loss.  Konami increased its own share 4.4 percentage points sequentially but that is not good run rate to use for the balance of the year as the March quarter (fiscal year end) is always Konami’s best.

 

BYI: LOW EXPECTATIONS MAY BE PRICED IN  - BYI

 

While video has historically been BYI’s Achilles heel, its V32 cabinet is doing very well and the core video product should see a nice lift with the new cabinet launch.  According to the company, roughly 50% of units being shipped today are video. BYI’s gaming operations business is also doing well.  We continue to hear that the company is executing well on multiple fronts here with the Tower Series, new wheel games, and excitement surrounding Cash Spin.  If the anecdotal evidence proves correct, gaming ops growth could accelerate over the next few quarters.

 

Given the recent move down, the stock now trades at 13x forward earnings.  This looks low especially considering the very favorable long-term fundamental backdrop for the slot suppliers.  Execution on the new cabinet and game library will be critical.


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