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Bally Technologies: Don't Bet On It

November 23, 2012 | About:


Bally Technologies (BYI) designs, manufactures, operates, and distributes advanced gaming devices, systems and technology solutions worldwide. BYI's product line includes reel-spinning slot machines, video slots, wide-area progressives, interactive and mobile applications, and Class II, lottery, and central-determination games and platforms. Bally also offers an array of casino management, slot accounting, bonusing, cashless and table management solutions.

Valuation

BYI is currently trading at a trailing twelve months P/E of 17.47 and a trailing twelve months EV/EBITDA of 9.41. Current P/E valuations represent a 5% discount from its five year average P/E of 18.9. BYI achieved a five year average ROE of 30.4% and a five year book value per share CAGR of 4.7%.

Financial And Business Risks

BYI is highly geared with a debt-to-equity ratio of 322% and a net gearing of 290%. This is partly mitigated by an interest coverage ratio of 18 and a current ratio of 2.4.

BYI's revenues are dependent on the earning power and life span of its games. The success of newly introduced technology and products, such as BYI's Pro Series cabinets and ALPHA 2 platform, iView Display Manager and mobile and online gaming platform, is dependent on customer and end player acceptance as well as the reliability and performance of products. Customers will only accept a new product from BYI if BYI can convince them that it is likely to produce more revenue and net wins than competitors' products.

Receivable days for fiscal years 2011 and 2012 average more than 100 days, this is a significant increase from an average of 70 days historically. This could signal an increased level of credit offered to customers and extended payment term arrangements which are more prevalent with BYI's customers in foreign jurisdictions. 35% of 2012 net accounts and notes receivables are from customers in foreign countries.

With the rate of growth of gaming in North America slowing down and machine replacement at historically low levels, BYI's future profitability and growth depends heavily on its success in entering new markets as well as new channels of distribution, such as mobile and online gaming.

Business Quality and Capital Allocation

BYI has high earnings visibility with more than 53% of recurring revenues. BYI earns recurring revenue from its installed base of 9,281 video lottery devices operated by NYSL and 2,437 video lottery devices deployed at horseracing and other gaming facilities under agreements with the Delaware State Lottery Commission and Maryland State Lottery Commission. BYI has 50% of the gaming systems market share for casinos with more than 2000 slots.

The gaming systems market has high barriers to entry. BYI has 313 global licenses, 425 patents related to games and systems, and approximately 600 patent applications pending in the United States as well as in many foreign countries. . BYI spent $98 million on R&D alone in the last twelve months, this is illustrative of the competitive landscape that requires continuous development of future generations of gaming products and systems. BYI employs over 700 sales, service, and support personnel to service more than 1,000 customers.

BYI does not pay a dividend. From November 2007 through September 2012, BYI returned more than $845 million to shareholders in the form of share repurchases at an average price of $38.96. Current shares outstanding for BYI have decreased by 25% compared with five years ago. In the past six months, three insiders have sold 335,000 shares for $15.9 million.

Conclusion

High debt leverage, increase in receivable days and significant insiders are negatives I can't ignore, despite reasonable valuations and a significant share repurchase program.

Disclosure

The author does not have a position in any of the stocks mentioned.

About the author:

Mark Lin
Mark is a private value investor and runs the Cheapskate Investing website which borrows from the wisdom of value investing giants, using a systematic quantitative screening approach to filter the global stock markets for cheap cigar-butts and wide-moat compounders. He is also a regular contributor to various value investing communities.

Visit Mark Lin's Website


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