As Motley Fool Stock Advisor subscribers are now aware, Tom Gardner pulled the plug on the long-disappointing Shuffle Master (NASDAQ:SHFL) pick last week. Personally, though, I understand the frustration with the stock, as well as the jitters that come when the CFO quits (as Shuffle Master's Richard Baldwin did at the beginning of the month). You see, I'm in the holding camp myself.
There's no question that Shuffle Master is the dominant table games player, with a near-lock on automatic shuffling machines and four out of the top five proprietary table games on the market. And while the company has certainly had integration problems with its acquisitions -- most notably the acquisition of Australia's Stargames -- there's little doubt about the products the company received from those acquisitions, primarily the Rapid series of live table games with electronic betting stations and the Vegas Star series of electronic table games. Moreover, the stock has limited downside at this point, in that the company's position would make it a prime acquisition target for another equipment manufacturer such as WMS Industries (NYSE:WMS).
There are a number of reasons why WMS -- or Bally's (NYSE:BYI), for that matter -- would be interested in Shuffle Master:
1. Electronic table games. At this point, although WMS has some of the best slot products on the market, the company has yet to make a foray into electronic table games, where International Game Technology (NYSE:IGT) and Australia's Aristocrat both have serious potential. Shuffle Master would plant WMS firmly at the top in this arena. Incidentally, Shuffle Master's installed "eTable" seats totaled 5,765 at the end of July -- up from just 500 at the end of 2005. Meanwhile, the company expects total worldwide eTable seats to nearly double in five years.
2. Electronic poker tables. Aristocrat is the international distributor for Poker Tek's (NASDAQ:PTEK) Poker Pro, the leading electronic poker table on the market. Meanwhile, IGT unveiled its own impressive electronic poker table last week at the Global Gaming Expo (G2E). Shuffle Master is the distributor for Lightning Poker, which will probably be one of the top three electronic tables (albeit probably third-best in my opinion at this point) once IGT's product hits the market. While the competition will be stiff, Shuffle Master expects to benefit from an increasingly prominent market: The company estimates the worldwide electronic poker table market will grow from 520 tables today to 7,800 in five years.
3. Video poker. I think this possibility has been completely overlooked. Though WMS has made some headway recently, it's far from putting a real dent in IGT's crown in the video poker arena. While WMS does have the benefit of an exclusive license of Harrah's (NYSE:HET) World Series of Poker brand, it will be nigh impossible for WMS to cut deeply into IGT's loyal customer base by trying to compete for those customers directly.
This problem demands a different approach. As we noted last week, Shuffle Master has a knack for putting out creative new poker-based table games. Meanwhile, WMS has both the need and the slot technology to turn those table games into effective video poker machines. In doing so, WMS may be able to capture a new market of video poker players and acquire new floor space.
Positively Fifth Street
Here's the thing: If you bought the stock at $25, Shuffle Master probably looks like a disaster; but if you bought it at $16, it looks more like a hiccup. That said, despite recent managerial problems, I believe Shuffle Master is well positioned from a business standpoint, and it's just a matter of time before the company turns things around. Just as importantly, there are companies out there -- chiefly WMS -- that would be interested in what it has to offer via acquisition, limiting the downside of the stock.
So, although I would agree that it may be appropriate for some investors to take the tax loss and find another alternative, I don't think investors who choose to hold onto the stock can be getting much the worst of it from here.
Try your luck with more Foolishness from the casinos:
