815 Pilot Road, Ste. G
Las Vegas, NV 89119
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
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?