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Stocks For Mom
by TMF Parlay

Anchor Gaming
(Nasdaq: SLOT)
815 Pilot Road, Ste. G
Las Vegas, NV 89119
(702) 896-7568
Gaming Industry Weekly

Happy Mother's Day, Mom!

Instead of getting you that toaster oven and standard bouquet of flowers, here's a gift that will keep on giving. I know a piece of paper may not smell as pretty as a dozen tulips, but hold this paper for a few years and I suspect that you will be able to buy as many flowers as your heart desires.

The piece of paper is shares in ANCHOR GAMING (Nasdaq: SLOT). I know how much you love to play those slot machines, and this stock is one way to hit the jackpot. The company has three main businesses -- slot machine routes in Nevada, operating casinos in Colorado, and designing and leasing proprietary slot machines. While the Nevada and Colorado operations may not grow very much, if at all, in the future, I think you will like what you see in their slot machine business.

HERE'S WHAT WE'RE HOPING FOR: The key to Anchor's business model is that they lease the majority of their machines for a percentage of the money the machine wins each day. By doing this, they insure a future stream of money long after they would have had if they outright sold the machines. Their leasing strategy is probably behind the 79% gross margins the slot machine division had in their last quarter.

These just aren't any machines the company is producing. The Wheel of Gold machine was by far last year's most popular new slot machine. The game is simple in that all it has is a "Wheel of Fortune-like" reel on top of the machine that gives out a "bonus" occasionally when a certain combination of reels is hit on the main machine. It is really a simple addition, but people play the machines like mad trying to get the bonus wheel to spin.

Speaking of "Wheel of Fortune", the company is producing a game based on the television show that works much like Wheel of Gold. There have been reports that the initial installations of Wheel of Fortune are earning about triple what the average slot machine earns -- very good news for Anchor.

I'm hoping that the Colorado and Nevada operations continue bringing in a steady string of income to the company while the slot machine division continues to grow like kudzu. If the profit trend continues, the stock should be sitting pretty. Their history of growth is impressive. Take a look at the trend:

            1993 1994 1995 1996  1997(3 quarters)
Revenues    29.6 54.8 97.4 116.5 107.7
Net Income   4.9  8.7 16.0  22.3  25.0

       1997est. 1998est.
Revenues    145.5    170.0
Net Income   34.4     42.1

The company's fiscal year ends on June 30 and consequently 1997 is already three-fourths completed for the company. The estimates are my own, but they are also well within the range of estimates also published. We Fools like to invest in companies that are proven leaders and Anchor's history of consistent growth is an attractive attribute. We like leaders, not laggards... and Anchor is certainly a leader.

Considering the stock has $2.38 in trailing earnings and is currently trading at a PE of only 11, the stock is attractive because the growth rate is much higher than the PE ratio. The company also has roughly $6 a share in cash and virtually no long-term debt -- a rarity in the casino industry. Furthermore, the company announced its intention to possibly buy back one million shares of the stock, a significant amount considering insiders also own over half the 13.6 million shares outstanding.

HERE'S WHAT TO LOOK OUT FOR: I may yank those shares back and sell them if the growth looks like it is coming to a halt. There are some indications that Wheel of Fortune may be taking away some of the business Wheel of Gold would normally see, but having someone "on the same team" take away business is always preferred to real competition. These two killer machines are not the end of the line since there are other games coming out, such as Totem Pole, that are there to pick up the slack. Even if the company's slots take a dive in popularity, there are the consistently profitable slot routes and casinos Anchor operates to back the company up.

Well, Mom, I hope you enjoy your gift. It's not traditional, but since when has this family been traditional?

Love, Paul

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