WMS's Turnaround Continues

NVESTING

Gaming Roundup: WMS's Turnaround Continues

By Jeff Hwang
February 3, 2006

Earnings season continues. Following Motley Fool Hidden Gems selection Ameristar Casinos' (Nasdaq: ASCA) mixed bag last week and a solid report from International Game Technology (NYSE: IGT) the week before, this week we had IGT's smaller rival WMS Industries (NYSE: WMS), as well as Las Vegas locals operator Station Casinos (NYSE: STN). Both companies continue to impress.

WMS's revenue climbs
Slot maker WMS Industries reported its fiscal second-quarter earnings Tuesday, and the company's turnaround remains in full force. The company saw revenues increase 21% to $113.4 million, helping net income almost double to $8.0 million, or $0.23 per share, and beating the $0.21 per-share analyst estimate.

Gaming operations revenue climbed 46% to $35.9 million, as the participation average installed base increased 34% to 6,141 units. Revenue per day per machine increased 18% to $55.68, reflecting the growth in high-yielding WAP (wide-area progressive) and LAP (local-area progressive) games, which accounted for 33% of the installed base at the end of the quarter -- up from just 5% at the end of last year.

Other items of note:

• Despite a slight decline in unit shipments from last year, product sales actually climbed 12% to $77.5 million because of a 17% increase in the average selling price to $11,648.
• The company said on its earnings call that it has shipped 3,200 mechanical reel games since introducing them a couple of years ago, and that represents 15% of shipments total shipments. While I haven't been impressed with the initial product, it appears that WMS is making greater headway in this area than I had thought it would.
• The company added only 65 WAP units to its installed base during the quarter. The company expects a ramp up in WAP placements during the fourth quarter, with the introduction of the highly anticipated Powerball game. Harrah's Entertainment (NYSE: HET) will be given a 30-day period of exclusivity at launch. Harrah's will also have a period of exclusivity on WMS' upcoming World Series of Poker video slot.
• WMS expects WAP and LAP games to represent 40% of its participation-installed base by the end of the fiscal year (ending in June). WAP games are yielding $100 per day.
• WMS bought back 128,000 shares during the quarter for $3 million.

The company did lower its outlook for the year, lowering expected new unit shipments by 1,000 units to between 22,500 and 24,000 units, partially offset by a higher expected average selling price per unit. As a result, the company expects revenues for the year to come between $455 million and $470 million, down from its previous forecast of $460 million to $480 million.

That said, I still like the growth potential in this small cap. And with the recent rise in rival IGT's stock price, I think WMS may present the better value at around $25 per share. And if you're interested, check out The New WMS Industries and Part II: A Slots Jackpot?.

Station Casinos posts solid Q4, sets Red Rock opening date
Las Vegas locals casino operator Station Casinos' phenomenal growth story continues. On Tuesday, the company posted fourth-quarter adjusted earnings of $0.69 per share, beating the $0.64 per share analyst estimate. Fourth-quarter EBITDA (earnings before interest, taxes, depreciation, and amortization) climbed 16% to $123.9 million.

Revenues at its major Las Vegas operations grew 11% for the quarter, while EBITDA margins climbed to an impressive 41.4% from 39.2% in last year's fourth quarter.

The company also set an April 18 opening date for its highly anticipated Red Rock Resort in Summerlin. The first phase will include over 400 hotel rooms, 3,000 slot machines, a 5,200-space parking garage, a nightclub, a spa, eight restaurants, 94,000 square feet of meeting space, and a 16-screen movie theater at a cost of $760 million. The Red Rock, along with expansions at three other properties, will juice results for the next couple of years.

EBITDA for the year increased a healthy 25% to $480.9 million and is expected to climb to between $545 million and $565 million in 2006, or somewhere between 13.3% and 17.4%. And with a phase 2 expansion of the Red Rock expected to be complete at the end of 2006, the company forecast similar growth in 2007, with EBITDA expected at $630 million to $670 million.

All told, Station's dominant position in the fast-growing Las Vegas locals market and a deep pipeline of development opportunities make the company one of the best plays in the industry. The only problem for the value investor is getting an attractive price.

Station Casinos' guidance

	2004	2005	2006	2007
EBITDA	$385.4M	$480.9M	$545M - $565M	$630M - $670M
Adj. EPS	$2.10	$2.74	$2.79 - $2.96	$2.77 - $3.13