Investors in gaming supplier companies have been enjoying the stock market’s bull run as much, or more, than those in other industries or even other sectors of the gaming industry.
After a long period in the doldrums, they have become high fliers again with Aristocrat, IGT, Scientific Games and Everi at or near new highs.
Aristocrat is easy to understand. The company has been hitting on all cylinders for several years with accelerating success. Sci Games and IGT recently beat earnings expectations and issued bullish outlooks both for their underlying businesses and in balance sheet improvement, alleviating concerns over the high debt taken on in their mergers of recent years. Everi, the smallest of those mentioned so far, seems to have caught fire with a new slot cabinet and games.
Each company deserves plaudits for managing its way through difficult times of high-debt taken on for acquisitions, especially in a stagnant if not, in many regions, declining business environment.
As examples, Sci Games has reduced interest rates by three-quarters of a percentage point while cutting debt-to-EBITDA to 6.7 times from times at its peak. Everi has reduced interest expenses by $8 million in recent refinancings, on top of savings from May transactions.
Further, suppliers today have a ballast, as it were, that they didn’t have when they were primarily selling and leasing slot machines. For Sci Games and IGT, it is lotteries that provide steady revenues to smooth out the volatility of the slots business. Everi has its original business—payments—to provide the stability.
And Aristocrat, while absent the ballast effect of recurring revenue businesses outside of games and systems, has more than built in a certain degree of security by achieving rapid growth in its core business.
A simple example of Aristocrat’s success is illustrated in the latest Eilers-Fantini Quarterly Slot Survey. The company scored 27 percent ship share in the third quarter, nearly double its market share and 11 percentage points above its trailing 12-month average.
Finally, the companies are benefiting from North American casinos loosening their purse strings nearly a decade after snapping them shut in reaction to the Great Recession.
The Eilers-Fantini survey again offers evidence of that as participating casinos reported that they intend to replace 7.4 percent of their existing machines with new ones over the next 12 months.
One of the interesting phenomena of recent years has been the rise of the small supplier.
For a long time, IGT had more than 60 percent of the North American market, while Aristocrat, Bally, WMS and a few others divided up the rest.
After the long round of mergers that saw Sci Games acquire Bally and WMS and Lottomatica acquire IGT to go along with its existing slot holdings, such as Spielo, the conventional wisdom was that the industry had consolidated and stratified. Dynamism was over.
Yet, the opposite has happened. Again, look at the latest Eilers-Fantini survey: Everi ship-share was 6.5 percent, five points above its historic market share; Incredible was 2.6 percent, up 2 points; Ainsworth was 2.3 percent, up a full point from its historic market share; companies intended to spend 3 percent on AGS machines, which compares to its Class III market of zero not all that long ago.
Nor does all of this reflect the dynamism elsewhere on the casino floor. Electronic table games, almost non-existent a decade ago, now represent 4 percent of machines in North America and a quarter of games in some international markets. That opens more possibilities, such as for Interblock.
This dynamism can create opportunities for investors in some of these emerging companies. AGS is almost bound to go public sometime soon. That possibility exists for Interblock. Ainsworth is about to get a huge, deep-pocketed owner when Novomatic closes on its 53 percent purchase of the company.
In short, what many thought was a dead space two or three years ago, has become a dynamic space.
It’s a dynamism we’ll examine in coming weeks.
