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Part I: The New WMS Industries

By Jeff Hwang - Updated Nov 16, 2016 at 1:02PM

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After a two-year hiatus that ended in 2003, the slot maker is coming back -- and in a bigger way.

Ordinarily, I don't spend too much time giving serious investment consideration to second-best players. But in slot maker WMSIndustries (NYSE:WMS), we have a compelling picture: WMS is positioned to capture significant new market share with new wide-area and local-area progressive participation slots and new products that now address 100% of the slot floor (instead of 35%), while benefiting from both the coming wave of industry expansion and the next slot replacement cycle.

At the same time, the stock has been beaten down in recent months, the company has initiated a $20 million share buyback program, and -- at its recent price of around $25 -- the stock trades at a reasonable discount to my approximation of fair value.

The new WMS
WMS Industries' turnaround story is for real. The company -- which had pioneered the increasingly prominent multi-line video slot machine -- took itself out of the game in 2001, when a software glitch that allowed slot players to cheat compromised the integrity of its product. As a result, WMS' market share of new game sales dropped from 18% prior to 2001 to roughly zero by 2003.

In 2002, leader International Game Technology (NYSE:IGT) commanded more than 70% of new slot sales, while rivals Alliance Gaming (NYSE:AGI) and Australia's Aristocrat accounted for less than a 15% share each.

But in 2003, WMS returned with a new operating system and a next-generation slot cabinet code-named Bluebird that featured a high-resolution LCD monitor and Bose speakers, helping to spark replacement sales as well as regain lost market share. In addition to the new cabinets, a new premium-priced, dual-screen version of them has also contributed to rising average selling prices.

The average selling price of new slots has increased from $8,813 per machine in fiscal 2004 to $10,250 in fiscal 2005, and to $11,309 in the most recent quarter.

And in 2004, the company launched its first line of mechanical reel games (45% of the typical slot floor) and video poker machines (15% of the slot floor), as well as its first wide-area progressive (WAP) slots. As a result, the very fact that WMS Industries now addresses 100% of the slot floor -- and has an attractive game portfolio -- positions it to gain significant market share.

WMS s napshot

Fiscal year ended June 30

2003

2004

2005

Total revenues

$179M

$230M

$388M

Product revenues

$86M

$146M

$279M

Gaming revenues

$93M

$84M

$110M

Gross profit

$106M

$128M

$196M

Operating income

($18M)

($2M)

$31M

Net income

($8M)

($1M)

$21M

New slot units sold

6,867

12,661

22,784

Average selling price

$8,318

$8,813

$10,250

Participation slot base*

5,086

4,240

6,539

Win per day per machine

$39.19

$39.60

$47.31

*at year-end

Market position
The company's goal is to establish itself as the clear No. 2 player in the game behind International Game Technology, or IGT. In my opinion, WMS Industries will have no problem doing so.

The company's bread and butter remains the multi-line video slot. And as discussed with Motley Fool Hidden Gems selection Ameristar Casinos (NASDAQ:ASCA), ticket-in/ticket-out capability has helped drive demand and profitability of penny slots, making WMS' video slots increasingly relevant. Both Alliance Gaming and GTECH Holdings' (NYSE:GTK) Atronic are smaller players in this space. And while Aristocrat is a significant player, I really don't get the appeal of its games at all (just a personal take -- the games are apparently very popular).

Now let's take a look at some of the newer stuff.

Wide-area progressives and local-area progressives
The most significant of the company's new products are its higher-yielding wide-area (WAP) and local-area (LAP) progressive slots. These progressive slots put a portion of each wager into a jackpot that can grow very large over time. With a dual-screen version of the Bluebird cabinet, these include video games based on Monopoly and Hollywood Squares, as well as a Clint Eastwood game. The Jackpot Party is an LAP game based on a standard video slot game, but with a communal four-stage bonus round.

IGT, Aristocrat, and Atronic all have variations of the same communal multilevel bonus.

While participation slots make up a relatively small portion of the slot floor, the effect on the slot manufacturer's bottom line is relatively huge because the manufacturer gets revenue by taking a piece of the action.

WMS' installed base of participation slots had increased 54% to 6,539 machines by the end of fiscal 2005 (June 30), up from 4,240 machines at the end of fiscal 2004. Over the same period, gaming revenues jumped 43% to $110 million. Meanwhile, the win per day, per machine rose from $39.60 to $47.31, thanks largely to the WAP and LAP games.

The winper day, per machine rate increased to $50.62 in the first quarter, ended Sept. 30, as WAP and LAP games made up 19% of the company's installed base of participation slots, up from 14% at the end of the fourth quarter.

WMS expects the installed base of participation slots to rise to 8,100 to 8,300 by the end of June 2006, with the win per day, per machine coming in at $53 to $56 for the fiscal year. By comparison, at the end of the last quarter, IGT had an installed base of 38,800 recurring revenue machines yielding $87 per day, reflecting its massive WAP jackpots that routinely reach hundreds of millions of dollars.

That's something for WMS to shoot for.

Video poker
In July 2004, WMS introduced its first video poker product, entitled 3 Way Action Poker. Don't expect the game to make much of a dent in IGT's video poker crown.

But WMS' newest video poker product -- carrying Harrah's (NYSE:HET) World Series of Poker brand -- is certain to gain at least some share in this area by virtue of Harrah's owning and operating more than 40 casinos. That virtually everybody else is competing against Harrah's may also limit the upside; but then again, anything is upside from zero. Currently, IGT is the default video poker slot manufacturer, and incidentally, has licensed WPT Enterprises' (NASDAQ:WPTE) rival World Poker Tour brand.

On the flip side, I'd be willing to bet that IGT's WPT-branded game is one game that you probably won't find in a Harrah's casino.

Mechanical reels
Mechanical reel games represent another significant opportunity to gain share. However, I'm less enthusiastic about WMS' prospects here because IGT is far and away the leader in this category, and I believe Alliance Gaming to be the superior competitor. But again, any gain here is an increase from zero.

Tomorrow: Part 2

GTECH Holdings is a Motley Fool Inside Value recommendation. Click here to give it or other Fool newsletters a try, and if you sign up for any one for one year, you'll get a copy ofStocks 2006-- our top analysts' picks -- free.

Fool contributor Jeff Hwang owns shares of WMS Industries, International Game Technology, and Ameristar Casinos. The Motley Fool has a disclosure policy.

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