Post of the Day
April 01, 1998
From our AOL
Anchor Gaming Board
Subject: Re: Beyond FY 98
"At the Q4 earnings post we will truly see if SLOT is still a high-growth company vs. a slow-growth company that has a few products that have reached relative market saturation. The determination as to which SLOT will be will is up in the air. Since we are not analysts who might be sticking their job and credibility on the line when making predictions, it is easy for us to become enamored with the company and it's history then make the assumption that this kind of hyper-growth we have seen over the last year will continue. I don't think it will and anyone who does is not being realistic since this kind of growth would mean that in a few years SLOT would have every machine in every casino."
Welllllll, I'm not so sure. I think I disagree with several of your points, although as usual they are presented in such a wonerfully thoughful way, that I needed a couple of days to think about them before responding. I also agree with several, particularly the thought about the price not increasing in anticipation of eps (that is, until the date gets closer and people get a better feel as to the actual number).
However, on the disagreement side, certainly we as individual investors can be just as motivated as analysts, if for no other reason than we have our own real, live money invested. I am, I think, and I feel my pain directly every time one of my stocks decline significantly in price. Also, I look very carefully and very hard at all of my assumptions and check them with others and in the field and on the boards, etc, but ultimately, the concept of investing is taking a risk in exchange for rewards. It is undeniable that there are more WOF's in place this Q compared to last. It is fact that the gaming win numbers reported by the State of CO are 15% higher for Feb & Jan '98 compared with the same months last year, as well as Dec '97. WOG's are still being played, Totems (stand alone and WAP) are lots of places and being played and there are even some new Silver Strike slots in the Star Trek casino at the Hilton. Q2 eps is traditionally below Q1 and Q3 is traditionally even or a bit higher than Q2. Q4 tends to be significantly higher than Q3 and Q1 significantly higher than Q4. All of this has been well discussed on these boards and I see no reason to believe that these items are at issue.
I strongly disagree with the suggestion that Q4 eps will be some sort of watershed. I think the stage was long ago set for Q4 eps that will be astonishingly high and Q1 numbers that could take us to the realm of disbelief. And, having said that, I realize it does, in some ways reinforce your assertions. But let me just say that SLOT's business model has been consistent for over two years now, and other than the accelerated growth rate, nothing really has changed. And even then the CAGR from the preceding 4 years was in excess of 40%, not a shabby accomplishment, IMHO, and the current 100%+ growth rate is merely the result of the incredible success of WOF. OK, so what?
Well, I think the so what is that the numbers aren't as difficult as they seem. Let's assume SLOT earns $5.50 for '98 FY. That's about 100% higher than the $2.61 last year. Since CashBall and WheelPoker are the next two up at bat, in order for the company to double eps again to say, $11 in FY'99 these two machines would have to produce roughly $4.00 in eps all by themselves. Not likely, considering that for such a thing to occur, There would need to be 3,000 average machines out at $75 a day, without impacting WOG or WOF. A completely unrealistic scenario. However, at 40% growth, or $7.70 for the '99FY that would only require and average of 1,500 at $50 per day and modest or no impact on the WOG or jv. Much more likely, considering the Bingo and Keno games, the Canadian revenues and the huge mound of cash ($100 million) the company will start the year with. Also, the company doesn't need to do anything north of 40%, if for no other reason than the market won't reward it, so why bother (that's not to say they have this attitude; far from it!). But a consistent 40% growth rate would certainly get a p/e higher than 18, I believe.
Moreover, the company currently has about 5,500 machines out in the casinos at the moment (assuming SLOT gets 1/2 of the 5000 +/- WOF machines in the jv) out of a generally accepted total of 450,000, or roughly 1.5%. But these machines produce roughly 6% of the total slot revenue, since they do 3 to 5 times the floor average. Having said that, even if SLOT were to continue to double revenue every year for the next 4 years (assuming the machines continued to produce consistent revenues), which is incredibly unlikely, they would only have 24% of the casino floor, but be producing 96% of the gross slot revenue and eps would be $15 more than the current share price (nearly $90 per share). Needless to say, this is, at best, fanciful thinking, but no more so than analysts assuming a 10% growth rate for next year. I have difficulty believing that the jv, even without any new introductions won't add 10% to eps and, depending upon the success of CashBall, that number will certainly be considerably higher.
Finally, I reiterate my point of a couple months ago that I want a company that generates CASH (what else matters?), and lots of it. SLOT is a veritable cash machine, with no debt and lots of depreciation and huge cash from the jv, etc., etc. And there is no end in sight, because you may also recall my post in which I noted that if the jv were to grow no more for the next 4 quarters and then begin to contract by 20% per year, the cash generated by the company over the next 5 years would be equal to roughly $55 per share, giving the remainder of the business a value of just $15 at today's price. Just plain stupid, IMHO, but an investment with great upside and very modest downside.
So, the analysts may very well be conservative and trying their best to cover their "reputations", but my sole interest is to cover my net worth and insure as best I can that it doesn't get sullied. And I think when it comes to evaluating SLOT, that's a much more direct interest than the analysts and motivates me far more than my reputation.
Thoughtful post. Thanks for raising the opportunity to consider these issues.