Back on September 23, shares of leading Class II slot-manufacturer Multimedia Games
"We have determined that RTB 1.2 is bingo and therefore a Class II game under the Indian Gaming Regulatory Act...."
Since then, Multimedia Games has jumped 40% to close at $41.95 following yesterday's earnings announcement. This requires some explanation.
The Class III designation applies to Las Vegas-style gaming -- games like blackjack, craps, roulette, and traditional slot machines. Class II, on the other hand, encompasses the likes of bingo and lottery-style games, over which states have no regulatory control.
Until recently, all slot machines fell under the higher regulated Class III designation. In some instances, Indian casinos have been sued or terminated by the Department of Justice for "passing" slots as a form of bingo game. But under the NIGC's advisory opinion, slot-like games are legitimate so long as they follow certain guidelines.
And that opens up a world of opportunity for slots manufacturers.
The key is California. In 2001, 46 Indian gaming facilities operated 42,000 slot machines in the state. Today, 53 tribes operate 62,000 slot machines, and nine others are under state compact. But there's a small problem: By that state compact, these facilities are limited to 2,000 Class III machines.
The new opinion opens the door for casinos -- including those managed by Station Casinos
Slot makers who had previously shunned Class II devices to avoid legal complications are joining the foray. International Game Technology
Another major player, Alliance Gaming
Yesterday, Multimedia Games said that it finished its fiscal year as the leader with 9,874 Class II stations installed. But while the stock looks reasonable at 16 times 2004 earnings of $2.64 per share, and despite a first mover advantage (beta tests of RTB 2.0 are already online in two casinos) and a nice growth rate, this is no sure bet.
After all, in addition to stiff competition from IGT and Alliance, investors should consider the probability that any growth in Class III gaming could eat away at Multimedia's Class II market. Just now, the odds may be stacked a bit too much in the house's favor.
Talk Class II on the IGT and Multimedia Games discussion boards -- only at Fool.com. Jeff Hwang can be reached at [email protected].