Bally Technologies Inc. (NYSE:BYI) has found a foolproof way to make money off casinos: sell them gaming devices, solutions, and applications. The company, which was known as Alliance Gaming Corporation from 1994 through 2006, has seen its stock rise 66% over the last year including a 19% gain so far in 2012. Bally’s fiscal year ended in June 2012, with the company reporting a revenue increase of 16% compared to the fiscal year which ended in June 2011. Sales were up in gaming equipment, gaming operations (Bally’s largest source of revenue, which consists of operating linked progressive or centrally determined games), and specialized system software. Higher costs, including a 9% in R&D spending to $96 million for the fiscal year, caused net income to only rise by 3%; however, a falling share count drove earnings per share up from $1.81 to $2.28.
On a trailing basis, Bally Technologies Inc. looks a bit expensive with its trailing P/E coming in at 21. However, Wall Street analysts think that the growth the company has been seeing is going to continue. EPS, as we’ve noted, grew 26% in the company’s last fiscal year. This is about what the sell-side expects to see this year, with a current-year P/E of 15 as a result. Out-year expectations imply a five-year PEG ratio of 0.8. We’re skeptical that the company will repurchase as many shares going forward (which drove its growth last year), but that factor should contribute and we think that its industry looks attractive.
Empyrean Capital Partners had the largest hedge fund position in Bally Technologies Inc. at the end of June according to our database of 13F filings by hedge funds and other notable investors. Empyrean, managed by Michael Price and Amos Meron, reported a position of 1.8 million shares; this made it one of the fund’s top five holdings (find more stocks Empyrean owns). Paul Reeder’s Par Capital Management increased its stake in Bally by 4% to a total of 1.6 million shares (see more stock picks from Par Capital Management). P2 Capital Partners sold a small number of shares but, like Empyrean, still had it as one of the fund’s five largest positions.
The best peer for Bally is the larger International Game Technology (NYSE:IGT). International Game Technology has seen its stock price fall 14% over the last year, underperforming the market and far underperforming the rise in Bally’s own shares. Earnings in the company’s last quarter dropped 46%. It is a slightly better value based on its current earnings- for example, it trades at a trailing P/E multiple of 18- but the sell-side thinks that it will see less growth over the next several years. Boyd Gaming Corporation (NYSE:BYD) and WMS Industries Inc. (NYSE:WMS) have market caps of less than $1 billion, but have good liquidity with Boyd (the smaller company) posting about $7.5 million in dollar volume on average over the past 90 days. WMS is the cheapest of these four stocks, trading at 14 times trailing earnings and 11 times forward earnings estimates, but its stock is also down over the last year as analyst consensus is for little growth going forward (2% annual EPS growth over the next five years). With that level of underperformance compared to its industry expected, we would avoid it. Boyd, conversely, trades at high multiples as it has been only narrowly profitable on a trailing basis. Its forward P/E is 39. Finally, we would compare Bally to Shuffle Master, Inc. (NYSE:SHFL), which is focused on table games products and analysis for casinos rather than video devices. Shuffle Master’s stock has also been up over the last year, and it reported growth in revenue and earnings in its most recent quarter compared to the same period in 2011. It trades at a bit higher valuation than Bally as well, at 23 times trailing earnings.