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Tickers in this Article: BYI, WYNN, MGM, IGT
Although American consumers aren't spending money like they used to, this may actually prove to be a period of big growth for the gaming industry for a number of reasons. Among the companies that I think could take advantage of such a trend is Bally's Technologies (NYSE: BYI), which makes slot machines and monitoring systems for a variety of gaming operators.

Why You Might Cash In On Gaming
While it's pretty common knowledge that consumers are reluctant to loosen their purse strings these days (one need only look at the health of the home building sector and the large automakers to come to that conclusion), gaming is a slightly different story. Casino operators such as Wynn Resorts (Nasdaq: WYNN) and MGM Mirage (NYSE: MGM) continue to show pretty solid earnings. In addition, we are starting to see some physical expansion in places like Atlantic City, NJ, and Las Vegas. MGM, for example, is building a huge facility in Atlantic City, while Wynn is building a big hotel called the Encore on the Las Vegas strip.

There are several reasons why the gaming industry could experience a growth spurt in the near future. First, the Fed's rate cuts have made the interest rate environment more favorable. This is a biggie, because casinos often float huge bonds in order to fund growth. Foreign investors are also looking to take advantage of the cheap U.S. dollar by scooping up deals in the U.S. For example, MGM recently received a multibillion dollar investment from Dubai World. Generally speaking, casinos with facilities in Asia seem to be doing pretty well, and this is providing them with large amounts of money to spend on expansion. The common theme here is that gaming companies seem to be fairly flush with capital and this is leading to expansion. (For more on how the Federal Reserve influences the economy, read the Federal Reserve tutorial.)

Bet on Bally's
I like Bally's for several reasons. First, the company makes equipment; therefore, as operators expand their footprints, companies such as Bally's stand to benefit. Another thing that attracts me is that the company is a little more flexible than a casino itself because it can make its money from a variety of different casinos and in a broad cross section of markets.

Then there's the refurbishment factor: Because of the intense competition in the gaming industry and the growing sophistication of gamblers, operators are pretty routinely refurbishing their gaming floors. This competitive trend also plays into Bally's hands.

It's More Than Luck
The good news is that it looks like Bally's is indeed faring pretty well. In its first fiscal quarter ended September 30, the company earned $21.3 million, or $0.37 per share. That compares quite favorably to the roughly $225,000 loss or break-even EPS performance it turned in the comparable period a year ago. In terms of revenue, the company generated $189 million in the latest quarter, which was roughly a 23% improvement over the $153.8 million it reported in the same period last year. The analyst community had been expecting Bally's to earn just $0.27 per share on roughly $180 million in revenue.



The substantial growth in earnings is partially a result of outstanding cost controls. In the first quarter, the company's SG&A costs increased at only about a 6% clip, well shy of the 23% sales growth rate posted. In addition, Bally's total gross margins rose from 48% of sales last year to 59% in the most recent quarter. These are major reasons why its bottom-line numbers were so good, and are a clear sign of a healthy business model. This suggests that Bally's can grow its top-line sales at a rapid pace while still keeping a lid on costs and improving its margins.

Going forward, the growth is expected to continue. At present, Bally's trades at about 22 times the current year earnings forecast of $1.78 a share, and Wall Street figures that the company will grow at just over 30% per year over the next five years. This is good news given that International Game Technology (NYSE: IGT), another well-known gaming equipment maker, trades at about 20 times the current year's earnings forecast of $1.65 a share, but is expected to grow by only about 13.5% per year over the next five years.

The Bottom Line
The gaming industry continues to fare relatively well in spite of the domestic economic malaise, evidence of which can be found in MGM and Wynn's growth as well as Bally's latest earnings results. In short, I am impressed with the company's margin improvements and ability to grow its revenue line. Because of these factors I believe that there could be some decent upside to the stock.

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