WMS: PLAYING THE EXPECTATIONS GAME

WMS reports tomorrow night and while FY2011 revenue guidance could fall below the Street, the contrarian in me thinks that may be ok.

Given the poor investor sentiment surrounding the gaming equipment suppliers – thanks in part to IGT – we think expectations are already pricing in lower FY2011 revenue guidance.  FQ4 should be fine and in-line with our $0.57 estimate although investors may be expecting a miss.  The long-term story is very powerful both from an industry and company specific perspective and the now low valuation provides a unique entry point.  We believe there are a significant number of interested investors on the sidelines because they fear the lower guidance. 

WMS may indeed provide revenue guidance modestly below the Street’s $852MM – we’re at $834MM – but expectations are low and the stock has underperformed.  WMS could see a relief rally due to short covering and the sidelined investors jumping in with the theory that projections will be once again beatable and the long term story remains intact.

If we were WMS, we would certainly capitalize on the opportunity to provide very conservative FY2011 guidance.  Investors seem to be expecting it and IGT has laid the groundwork.  Guidance will be back end loaded given the uncertainty surrounding the timing and type (for sale vs lease) of the Illinois business and well as timing issues surrounding Italy. 

Investor expectations may be even lower following IGT’s weak FQ3 performance and guidance.  However, we would caution investors that IGT’s slot ship share was dreadful in FQ3 and actually in the March quarter as well, so the industry overall is probably performing better.  As we’ve written about, IGT had a big one-time shipment into Canada in its FQ2 which inflated market share.  IGT is now tracking in the mid 20s% of total ship share.  In fact, WMS may surpass IGT’s ship share in the quarter for the first time in history.

So we’re does that leave WMS? 

  • Highest quality player in an industry at the trough of a 5 year bull slot market
  • Well positioned to steal participation revenue share from an unsustainably high level at IGT
  • Built-in growth from entering Mexico and Australia
  • Near term new markets of Italy, Illinois, and Ohio
  • The sky’s the limit on additional new state and international markets given the thirst for additional tax dollars
  • A now low valuation