Gaming Roundup: IGT Earns a Hold

IGT's stellar first-quarter earnings report boosted the stock price into fair value range. Plus, Isle of Capri's timing is off on its $85 million expansion project in Kansas City, and Shuffle Master is doing all right.By Jeff Hwang January 20, 2006 Capping off a 10-week-long rally since its last earnings report, shares of slot king International Game Technology (NYSE: IGT) jumped 10% to a new 52-week high at $35.32 yesterday following its first-quarter earnings release. My colleague Nathan Slaughter went over the main figures yesterday (see "IGT on a Winning Streak"). Helping drive the stock was the quarterly earnings figure of $0.34 per share, which handily beat the $0.27 per-share analyst estimate.Several other items of note:1. Sales to new properties accounted for 32% of the company's 14,300-domestic slot unit sales, including 100% of the 2,400-plus slots at Boyd Gaming's (NYSE: BYD) new South Coast Hotel and Casino in Las Vegas, as well as a couple of the newly reopened casinos in Biloxi, Miss. For the year, the company still expects to sell 50,000 units, only 25% of which will be to new properties.2. The company spent only $73.1 million on share repurchases during the quarter -- under the $100 million-per-quarter pace the company had previously set as a goal. With the stock back up around $35 from its lows in the mid-$20s, the value of the repurchases going forward has been relatively diminished.3. Leased operations (racinos) accounted for 60% of the 4,500-unit increase in the overall installed base of recurring revenue machines during the quarter. IGT's leased-operations installed base represents less than a quarter of IGT's 43,300-unit total installed base. Leased operations feature lower revenue yields but higher margins. As a result, revenue per day was down from $87 in the fourth quarter to $75 in the first quarter, but gaming operations gross margins were helped up five percentage points to 57%.4. Non-machine sales -- which include systems sales -- accounted for 36% of total domestic revenue, thanks to the installation of a record 15 IGT Advantage Systems during the quarter. IGT Advantage allows casinos to efficiently monitor and manage their slots.5. IGT now has server-based gaming products in testing at two sites: the Barona Valley Ranch and Resort in San Diego, and MGM Mirage's (NYSE: MGM) Treasure Island in Las Vegas. The company hopes to have six or seven test sites by the end of the year.Overall, IGT is in good shape, and things will only get better toward the end of the year, as Pennsylvania's racinos lead a new wave of domestic expansion. The only problem from an investor's standpoint is that the stock no longer qualifies as "dirt cheap" or a "clear buy" -- it has reached my fair value range of $35 to $40 per share (see "IGT: Time to Buy?"). The stock currently trades at less than 30 times this year's earnings and at a reasonable 25 times next year's earnings.That said, I'm no longer a buyer here, although I'm certainly happy to hold onto the shares I already have.Poor timing on Isle's KC projectOn Tuesday, regional casino operator Isle of Capri announced plans for an $85 million expansion project at is Kansas City, Mo., property. According to Rick Alm of The Kansas City Star, the expansion would add roughly 400 slots on the second floor (the current entrance level) of the riverboat. The plans also call for two new restaurants and a "revamping" of the buffet, a new front entryway into the bottom floor of the casino, a refinishing of the exterior facade, and a 1,000-space extension of the parking garage that will allow for new indoor entrances to the casino. The company expects construction to begin in the spring and says the project will take 12 to 15 months to complete.That an expansion is in order at Isle's KC property is a no-brainer. The question is, why wasn't this done sooner?Isle of Capri has seen its market share fall from 15.9% in 2002 to 13.8% in 2005. It's true that Isle's results in 2005 were affected by the closure of the I-35 Paseo Bridge -- right outside the casino's front door -- from May 17 through the end of August. But that's exactly the point.The time to embark on an expansion project would have been while the bridge was closed, when the casino was in no position to compete anyway. Now, instead of four months with bridge access blocked and an additional eight to 11 months of construction disruption, Isle will have had four months without the bridge, a brief recovery period, and then another 12 to 15 months of construction disruption to deal with.As it is, Isle of Capri is dead last in a briskly growing market thoroughly dominated by Motley Fool Hidden Gems selection Ameristar Casinos (Nasdaq: ASCA), which commanded 36.7% share of the $688.6 million gaming market in 2005. Harrah's Entertainment (NYSE: HET), which has also been making substantial upgrades to its property just a few miles down the road from Ameristar, is the clear second-best player in the market, while Penn National's Argosy Riverside has vaulted ahead of Isle as the clear third-best player since opening its new barge in December 2003.Isle's plans don't currently include a new hotel; it's the only competitor in the Kansas City market operating without a hotel or plans for one. The Argosy Riverside has plans to open a 250-room hotel during the second quarter of 2007.Kansas City MarketCasino 2002 2003 2004 2005 Ameristar $209.3M $211.1M $237.5M $252.8M Harrah's $206.9M $209.0M $188.9M $191.8M Argosy $98.2M $96.7M $146.8M $149.2M Isle of Capri $97.4M $97.7M $103.8M $94.8M *Source: Missouri Gaming CommissionShuffle Master appears all rightMotley Fool Stock Advisor selection Shuffle Master (Nasdaq: SHFL) said on Tuesday that it's delaying the filing of its form 10-K for the fiscal year ended Oct. 31, 2005.One Fool who took note of the announcement asked, "Is this part of a bigger problem?"It doesn't appear that way. For one thing, Shuffle Master's business is good enough that it doesn't need to cheat. That said, the issue at hand seems relatively benign: The company said that a "non-material" transaction at its CARD subsidiary -- which has been shipped and paid for -- "may have been incorrectly recognized" in the company's fiscal fourth quarter of 2005 ending Oct. 31, rather than the first fiscal quarter of 2006. In other words, it's just a matter of the timing of when the transaction was recorded, rather than how the transaction was recorded.Contrast that with the problems at WPT Enterprises (Nasdaq: WPTE) parent Lakes Entertainment, which went an entire year without filing a 10-Q because of concerns over how the company accounted for loans made to its Native American partners.In its press release, Shuffle Master basically said it's just taking the time to make sure that similar mistakes haven't been made. The company said it expects to file its 10-K within the 15-day extension period ending Feb. 1 and that no material adjustments to the fourth-quarter results as reported in December have been identified thus far.If there is a bigger problem, we'll probably find out by the end of the month.