Gaming Partners

Adam over at Value Uncovered first wrote about GPIC here. That’s were I heard of the company.

The more I learn about GPIC the more I like. Since Adam did a good job, I will focus on some other points I can make for and against investing in the company.

Pros

  • Since the business combination in 2002, GPIC has improved their operating metrics.
  • Despite the cyclical nature of the business, GPIC remained cash flow positive through the recession.
  • Dominant global position in casino chips.
  • Not afraid to return money to shareholders, as evidenced by the last two annual “special” dividends. There were also dividends paid in 2005 and 2006.
  • RFID patents (high and low-frequency) don’t expire until 2015.
  • No collective bargaining agreement with employees.
  • Just received first order from gaming establishments in Mexico.
  • Should have enough capacity available for this economic cycle, which means no heavy capital expenditures.
  • Asia will drive growth going forward, primarily Macau and Singapore for GPIC.
  • There are decent tailwinds in this sector. As well, most state budgets are in poor shape. This may encourage more casino openings.

 

I know the chart is kind of messy, but it illustrates how GPIC has improved operating measures since the business combination in 2002.

Cons

  • The CEO retired last year. His replacement has increased compensation.
  • Casinos are still reluctant to replace existing products with new ones until the economy is on firm footing.
  • New casino openings are important to GPIC. Though GPIC may not need them to be profitable, it would make todays’ revenue numbers more like temporary peak numbers if no new casinos are opened.
  • Though there may be more states legalizing gambling. It doesn’t necessarily mean that casinos will be opened. The focus can shift to online gambling.
  • One director owns almost 50% of the company, with little other insider ownership.
  • The stock is quite illiquid.
  • There may be some near term weakness as you may have to wait for more casinos to be opened.

Valuation (using $6.25 per share)

  • Price to tangible book is 1.25x
  • EV/EBITDA is under 4
  • EV/FCF around 5
  • 10x P/E, but less than 7x EV/E
  • EPV at $10.15
  • DCF around $10.25

Summary

For less than 10x earnings you are getting a company that has a dominant position in a growing industry. There is no public company that focuses just on casino supplies like GPIC, so relative valuation is tough to determine. ROIC, ROE and profit margins are all very healthy. There is insider ownership and no insider selling. Management has returned some of the excess cash to shareholders. A steady dividend or major share repurchase would be huge for the stock. International growth should drive revenues going forward. Many of these emerging countries are growing at several multiples of what we are here in North America. Though not incredibly sexy, GPIC should provide investors with a decent return with limited risk. I put a low-end fair value around $10, with a more aggressive intrinsic value between $13 and $15. Anything under $7 seems worthy of purchase.

Dean

Disclosure: The author is long shares of GPIC at time of writing.

GPIC’s new website

2 Comments

Filed under Company Analysis

2 responses to “Gaming Partners

  1. Great additions to my analysis. As you mentioned, GPIC’s results are heavily influenced by new casino openings, leading to cyclical results (as evidenced in your operating metric chart)

    But the company has already proven it can handle a severe economic downturn, remaining profitable throughout. The future outlook is certainly better than 2008-2009.

  2. Pingback: Weekend Values – January 16, 2011 | Value Uncovered

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