Investors familiar with the gaming industry might remember the name Paul-Son Gaming Supplies. A maker of poker chips and craps dice, it went public in 1994, and then, through a reverse merger, joined forces with French gaming supplier Bourgogne et Grasset. The merged business became known as Gaming Partners International (Nasdaq:GPIC) and operates a wonderfully niche business. It might not be that big, but it's definitely got game.
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Casino Chips
Chips are one of the most common items found in any casino and arguably the most important. According to a 2007 article in Forbes magazine, the company holds 70% of the world's poker chip market. In 2010, poker chips accounted for 65.1% of its $59.9 million in overall revenue. This would suggest a market size of just $56 million. That's hardly worth fighting over and it's precisely this reason why investors should think twice before passing on this niche micro-cap. It has a barrier to entry that can't be beat: lack of interest. Casinos aren't going away. Just look at what Wynn Resorts (Nasdaq:WYNN), Las Vegas Sands (NYSE:LVS), MGM (NYSE:MGM) and Melco Crown Entertainment (Nasdaq:MPEL) are doing in Macau. The industry is just now getting back on its feet after several years of painful losses. While the global economy might still be on tenterhooks, things are looking up.

In fact, GPIC's first quarter results were so good that CEO Greg Gronau had this to say in its Q1 press release, "Given projected casino openings and our sales backlog for 2011, revenues and earnings in the next three quarters may not reach the same levels that we saw in the first quarter." What this means for the remainder of 2011 is anybody's guess. However, the company generated $49 million in the final three quarters of 2010 at an average of $16.3 million per quarter. That's less than the $17.8 million it delivered at the end of March 2011. Considering business is reasonably strong, I'll go out on a limb and suggest 2011 revenues will be flat to a slight increase ($60-62 million) with 2012 being the big year. (For related reading, see Sinful Investing: Is It For You?)

Micro-Caps Come in Two Varieties
In my experience, micro-caps fall into two camps. Those that are small like Hansen Natural (Nasdaq:HANS) and Green Mountain Coffee Roasters (Nasdaq:GMCR) but on their way to becoming mid-caps, and then there are those that will forever be small. Gaming Partners International falls into the latter category and that's ok. By understanding its business and the cyclical nature of it, you'll know when to accumulate shares. For instance, it has $3.76 in cash per share; it could go eight quarters without selling a single thing. That's not going to happen. In its best year back in 2006 when revenues hit $74 million, it had $1.38 per share. It's accumulating cash faster than it can spend it and that's always a good problem to have.

Management has chosen to pay special dividends in December the last two years as a way to reward shareholders. I don't see this ending unless it finds a large acquisition that makes sense. Given its dominant position in the gaming supply industry, I'm doubtful there's anything significant worth acquiring. As for share repurchases, I don't like them. Apart from special dividends and acquisitions, I'd rather see it eliminate the small amount of debt ($6.7 million) that it has, although at an interest rate of 1.51%, it's not a big concern. (For related reading, see Going All-In: Comparing Investing And Gambling.)

Share Price
Have a look at its 10-year chart and two things should jump out at you. One, it's spent about half the last decade trading around $5. Two, its all-time high is $25.95, achieved in August 2006. Its enterprise value is just three times EBITDA. At its all-time high, the multiple was 17.1. This means that although its current EBITDA is two-thirds what it was back in 2006, its enterprise value isn't anywhere near two-thirds EBITDA. If it were, its shares would be trading just below $20. Joel Greenblatt uses earnings yield as one of his two criteria for evaluating stocks. He prefers earnings before interest and taxes (EBIT) divided into enterprise value. Using this calculation, I get an approximate earnings yield of 24.9%, which is tremendous. Now keep in mind, I've been lazy in this instance by simply taking the current trailing twelve-month EBITDA of $12 million and subtracting $3 million for depreciation and amortization. It isn't perfect but it's faster than going back over the past four quarters. If you're so inclined, please feel free to do so after reading the article. (This measure has a bad rap, but it's still a valuable tool when used appropriately. For more, see EBITDA: Challenging The Calculation.)

Bottom Line
Gaming Partners International is undervalued. There's no two ways about it. However, just because it is (or I think it is) doesn't mean Mr. Market has to agree. There's a distinct possibility that it stays where it is for several years. With an estimated special dividend of 18 cents likely on tap in December, my suggestion is to buy the stock, collect the dividend and reevaluate then. You've got very little to lose - but remember, we are talking about a micro-cap here and volatility is the name of the game. (For related reading, see How To Choose The Best Valuation Method.)

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Tickers in this Article: GPIC, WYNN, LVS, MGM, MPEL, HANS, GMCR

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