Marcial: Pros Bet on WMS Industries

WMS, a major designer and manufacturer of slot machines and video lottery terminals, is drawing players with its diverse product sales and resilient revenues

WMS Industries—52-week price

By Gene Marcial

BW's Gene Marcial

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"Lady Luck has left the premises," says one analyst who has turned negative on casino and gaming stocks.

As the gambling hot spots such as Las Vegas, Macao, and Atlantic City continue to reel from the insidious forces of the recession, investors are steering clear of the gambling group. Share prices of many of the companies in the hotel and gaming industry have fallen to historical lows, notes analyst Dominic B. Silva of independent research outfit Value Line (VALU). They appear to be in the middle stages of a down cycle, he adds.

But one gaming play that continues to draw crowds is WMS Industries (WMS), a major designer and manufacturer of video and reel spinning slot machines, as well as video lottery terminals. Its machines differ from the traditional slots in that they offer secondary bonus rounds, enhanced colorful graphics, and bang-up digital sounds.

The stock has showed resiliency during the market's downturn last year and participated in the recent rally, streaking up to 30.41 on May 15 from a 52-week low of 15.48 on Mar. 5, 2009. Last year the stock traded at an all-time high of 41.

The company surprised Wall Street on Apr. 21 when it reported its fiscal third-quarter results, which beat analysts' sales and earnings forecasts.

"We are impressed with the company's ability to drive sales and margins," even as some of its customers (mainly casinos and other gaming operators) are struggling because of the economy, says Brian McGill, gaming analyst at securities firm Janney Montgomery Scott, who rates the stock a buy. (Janney has done business with WMS.)

bright earnings prospects

Another bullish note was management's announcement that it was increasing revenue and operating guidance for fiscal 2009 (ending June 30). It forecasts revenue growth of 9% to 10%, up slightly from its earlier estimate, and an operating margin rising to 18.5% to 19%, from 18% to 18.5%.

That has led McGill and other analysts to boost their 2009 earnings estimates, after WMS posted a 34% jump in its first-quarter earnings from a year ago, to 43¢ a share. Revenues also beat consensus estimates, rising 5%, to $181 million, buoyed by strong gaming operations and higher prices for WMS's products.

WMS is in two businesses. The larger revenue producer is in the sale of gaming machines, conversion kits and parts, and both original and used manufactured equipment. In fiscal 2008 this unit produced revenues of $421.2 million, up from $366.3 million in the previous year.

The other business is its gaming operations, including the leasing of video lottery terminals, games, and game content to third parties. This part of the business accounted for fiscal 2008 revenues of $228.9 million, up from $173.5 million the previous year.

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