Expert says future of slot makers looks good

By Liz Benston (contact)

Thursday, Jan. 9, 2003 | 11:07 a.m.

Northeastern states like New York, Pennsylvania and Maryland are grabbing many of the headlines over the potential of legalizing more ways to gamble following last year's elections.

But it is California -- a state grappling with how to contain its rapidly-growing network of Las Vegas-style tribal casinos -- that is attracting attention from one Wall Street analyst who calls the Golden State one of the strongest potential markets nationwide for new slot machines.

California's potential slot market is "underestimated" on Wall Street, Deutsche Bank Securities casino industry analyst Marc Falcone told a group of slot industry managers at a conference in Las Vegas Wednesday.

Roughly 40,000 to 50,000 slot machines exist in California -- well below Nevada's count of at least 180,000 machines.

Still, if the state is successful in renegotiating compacts with Indian tribes this year, that number could rise to as much as 65,000 to 75,000 new machines over the next couple of years, Falcone said. And the number of slots could double over the next several years.

Similar growth occurred more than two years ago when a state constitutional amendment allowed tribes to offer Las Vegas-style casinos, complete with gambling floors dominated by slot machines, he added.

New and existing factors are driving slot machine growth, including the expansion of Indian casinos and the prospect of creating "racinos" by legalizing slots at racetracks.

That trend, coupled with replacements of older machines, represents strong industry growth, Falcone said.

"Historically (growth in) the slot industry has been driven by new unit sales because of the expansion of gaming."

Save for California, the country has seen few new casinos since 2000 -- making the replacement market more important, he said.

The replaced machines generate another 70,000 to 100,000 new machine orders per year -- figures that could climb to 120,000 or 130,000 given new technological trends, he added.

A major driver is so-called "cashless" slot machines that dispense paper tickets instead of coins.

Industry insiders have hailed such machines over the past year, saying they save on labor costs and increase profits by speeding up play.

The machines' profit potential is still "underestimated" by analysts, Falcone said.

Only about 10 percent of slot machines use cashless systems and about 70 to 75 percent of domestic games -- representing upwards of 470,000 machines -- can't be retrofitted with the systems unless they are replaced.

The draw of such machines could also speed up the "replacement cycle" -- the typical amount of time slot machines stay on the floor before they are changed out.

Cashless slots could speed up that cycle from seven to nine years to about four to six years, Falcone predicts.

Many Wall Street analysts have been bullish on International Game Technology and Alliance Gaming Corp. of Las Vegas even as they have cut ratings and earnings estimates for casino companies, which have been hurt by a slowdown in consumer spending on the Las Vegas Strip, especially during the holidays.

Early Wednesday, shares of Las Vegas casino holdings fell by more than 10 percent as two major operators -- Mandalay Resort Group and MGM MIRAGE -- issued warnings that they would significantly miss analysts' year-end earnings estimates.

Nevada's major slot makers didn't emerge from the storm unscathed. But they remain highly rated by most analysts.

This week, Deutsche Bank Securities initiated coverage of the country's top slot manufacturers, IGT, Alliance and WMS Industries Inc.

Falcone rated shares of IGT a "buy" based in part on the opinion that the world's largest slot maker is well-positioned to continue to reap the rewards of worldwide gaming expansion. Similar reasoning stands behind his "hold" ratings on Las Vegas-based Alliance and Chicago area maker WMS, though shares of both companies appear to already reflect that potential, he noted.

The slot conference preceded today's American Gaming Summit, an annual conference that gathers top casino executives and other industry insiders. This year's event is sponsored by a range of gaming companies and suppliers including IGT, Alliance Gaming and WMS.