Post of the Day
June 9, 1998

From our AOL
Anchor Gaming Board


Subject: Cash Machine
Author: Iveystone

There really is nothing like running your own businesss to teach you the importance of cash flow and cash management. One develops a keen awareness of payables, receivables and capital investments as each payday rolls around (and tax payment day and mortgage payment day, etc.). Cash flow becomes more important than almost anything else, because sometimes just a few hundred or a few thousand dollars a few days earlier can spell the difference between being in business and being out of business. And when the business achieves a cash flow positive position and outlook, then the business can really be called a success, because it's the excess cash that can be used to pay off the debt, provide a return to the shareholders, make acquisitions, but most importantly, not to have to worry about having enough cash for payroll and payroll taxes (LOL). Anyone who has started a business or run a a business knows what I mean.

Having said that then, the real measure of an investments success, IMHO, is not eps (although important), not market share, not marketing, not new products, not even quality management. But a combination of those things that is measured first, second and third as the ability and potential to generate cash. Period. Give me currrent cash flow and I'm happy. Give me current recurring cash flow and I'm ecstatic. Give me current recurring cash flow that is already big and is still growing, and I'm in heaven.

  "Give me current recurring cash flow and I'm ecstatic. Give me current recurring cash flow that is already big and is still growing, and I'm in heaven."

Well, this ain't Iowa, so it must be heaven, because just a peek at a forecast of SLOT's cash flow for the next two or three years is truly heavenly (how corny, but I couldn't resist - get it? Iowa, corny....).

Let's assume that SLOT has $56.5 million in cash on hand at 3/31/98 (or we could just look at their financials and see the same number). Let's further assume that they have $15 million as their part of the jv cash (probably close, maybe conservative). Let's assume Q4 generates $20 million or so in net cash (probably a couple of milion high, because of cap ex, but let's use it for ease of addition). That puts cash "owned" by SLOT at right around $90 million at the end of the fiscal year.

Now, let's forecast (very conservatively)

eps for FY:

1999 $6.00 (ha, could hardly even type such a low number)
2000 $7.20 (oh please, 20% growth??? This is painful)
2001 $9.00 (25%, but still...historical is over 40% average!)
total $22.20

shares 13.2 million

Net earnings = $293 million, let's say $300 million for grins.

Add depreciation of $15, $20, and $25 million for the 3 years -- total $60 million. Subtract cap ex of say $75 million?? (6,000 new machine equivalents at $10,000 a machine plus $15 million(net) for Canada, etc. Just a guess, and probably low, but so is eps). So, let's see what we've got.

Cash owned at 6/30/98              $ 90.0 million
Cash from earnings                  300.0 million
Depreciation                         60.0 million
Cap ex                              (75.0) million

Cash at the end of 3 years         $375.0 million
Cash per share                      $29

But the really interesting thing is that there is just no end in sight. WOG has been out for 2 1/2 years and is still generating lots of $$$$. WOF, Totem, still in prime time. CashBall and the 5 other new machines, well, who knows whether they'll generate lots of cash or HUGE and ENORMOUS amounts of cash . And new games introduced at the Gaming Conf in Sept??? And being secure in knowing that Randy's and Joe's and TJ's options vest over several years (current worth around $10 million for each of them), etc. etc. etc.

"And what does all this mean?? Well, to me it means that SLOT is unlikely to have to worry about covering payroll anytime soon..."  

And what does all this mean?? Well, to me it means that SLOT is unlikely to have to worry about covering payroll anytime soon<g>, But more than that, it means that my stock that I bought last year at $34 will be equal to the cash on hand in a total of 5 years from the date I bought it and the stock I buy today at $88 and change will represent cash on hand in 8 or 9 years. And how many machines do they need to have out to accomplish this feat?? Probably around 12,000, (which includes SLOT's 1/2 of the, say 8,000 machines in the jv). And what percent of the market is that? THREE (3) Percent. (12,000 divided by 450,000. Or just use slots only at say 350,000, and it's still only 3 1/2). Good Grief!

One more thought. Let's compare SLOT to a high flying company like AOL as an example, (that trades at a roughly 300 p/e on trailing eps of $.32). AOL is cash flow negative at the moment and is projected to turn positive perhaps in '99, probably '00. SLOT will do around $8 per share in cash flow for '99. Probably in the $10 range for '00. For AOL to do comparably ($8 per share), it will have to generate nearly $2 Billion in cash, nearly twice expected FY'98 total revenues. When will that occur I wonder? 5 years, ten years? Ever? Someone is missing the point of investing, here, and I suppose it's me, since I own SLOT and not AOL (LOL).

Anyway, if one's investment strategy includes owning a company that generates cash and lots of it, here it is. With all the silly things that get said about this company, the one thing that should be said over and over and over is that this company is generating tons of cash flow and there is no reason to believe that it will stop anytime soon. Ken


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