Bally's Winning Ways

While the rest of the gaming industry is seeing its earnings dive this year as higher gas prices, rising unemployment and unease caused by the ongoing housing slump puts a crimp on consumer entertainment spending, slot machine maker Bally Technologies (NYSE:BYI) continues to report impressive revenue and earnings growth. (If you are feeling overwhelmed by rising oil prices, read Getting A Grip On The Cost Of Gas.)

For the fiscal year ending June 30, the company reported a five-fold increase in net income to $107.2 million, or $1.85 per share fully-diluted, compared to $22.3 million, or 40 cents per share, for the same period a year earlier. While the company reported a healthy 27% boost in gaming equipment revenue, as unit sales of its so-called "one-arm bandits" rose 24% to 26,397 units, the big payoff was in the company's systems business unit, which sells and maintains the increasingly sophisticated software needed by casino operators to operate and monitor the hundreds of video "slots" that typically occupy the floors of most major casinos. Revenue was up 54% for this unit.

The company also re-affirmed its earnings per share guidance for the fiscal year ending in June 2009 in the range of $2.10-2.50, which appeared to confirm the fairly positive analyst expectations of $2.35 for next year. (Explore the controversies surrounding companies commenting on their own forward looking expectations in Can Earnings Guidance Accurately Predict The Future?)

Impressed by these numbers, investors bid up Bally shares more than 8% during the trading day following the announcement.

Cost Conscious Gamblers Shifting To Slots
Cash-strapped consumers are still gambling, but they are spending less at card tables or the roulette wheel in favor of less pricey slot machines. That trend has been a bonus to Bally and rival slot manufacturer International Gaming Technology (NYSE:IGT), but a bane to Shuffle Master (Nasdaq:SHFL), which makes products and systems for table-based games of chance.

Major Deals Help Gain Market Share
Another source of Bally's success has the been its ability to score major deals with the big casino operators. Last year, it signed a combined slot, casino management and bonusing systems deal with Las Vegas Sands (NYSE:LVS) to cover nine resorts in Las Vegas, Macau and Singapore. The deal trumped WMS Industries (NYSE:WMS), who is the existing casino management systems provider for LVS properties, as the new deal covers many new properties only in the planning stages. So far in 2008, Bally has signed multi-year deals to sell slots to tribal casino operators in Florida and California, as well as casino management and marketing systems to privately owned Harrah's international operations.

China Could Restrict Macau Visits
Overseas markets have been a sweet spot for Bally, which reported a healthy 18% increase in international sales in the last quarter. The growing Asian middle classes can now exercise their gambling instincts in places like Australia, Macau, Malaysia, the Philippines, Cambodia, Myanmar, Laos and starting next year in Singapore. However, recent rumors that the Chinese government could begin restricting visits by mainland Chinese to Macau prompted a selloff in the shares of casino operators MGM Mirage (NYSE:MGM), Wynn Resorts (Nasdaq:WYNN) and Las Vegas Sands all of whom have significant stakes in Macau, and represent significant potential business for Bally.

The Bottom Line
With the shift in consumer preference toward slots, Bally stands out from the rest of the pack in the gaming industry as being surprisingly recession proof in the near-term. Over the long-term, the growth in Asian gaming looks unstoppable. Even if we see the Chinese government act in some token way to curb mainland punters from crossing into Macau, I'm sure there will be be plenty of cheap flight deals from the mainland to Singapore.