GPIC Summary

Gaming Partners Intl (GPIC.OB) is posting one of the best years in company history due to new casino openings in the U.S. and strong growth in Asia.

The company is protected by a strong moat – casinos often stick with a single supplier – especially for GPIC’s new high-tech casino chips where the company is protected by patent until at least 2015. Worldwide, GPIC controls over 70% of the casino chip market.

Despite a sharp decrease in revenue from the 2006 peak, the company has managed to remain profitable and generate solid cash flow – it now sits on almost $1.53/share in net cash.

2010 financial results show a strong improvement yet the stock remains only 11% above its 52-wk low.

Company Information

Gaming Partners International Corp (GPIC) has been distributing casino chips and other gambling supplies in the US since 1963 and in Europe since 1923.

GPIC is the leader in casino chip manufacturing and was an early adopter of high-tech radio frequency identification (RFID) chips designed to prevent counterfeiting and better track gambling results. Casino chips made up 66% of revenue in 2009.

In addition to chips, the company also stocks table layouts, playing cards, gaming furniture, dice, and other table accessories.

Casinos usually place a large order at opening, followed by replacement orders as chips wear out so the company benefits from repeat business. Despite this stickiness, large revenue increases generally result from new casino openings, where GPIC can supply initial chip orders and other gaming accessories.

Financial Results

In 2009, GPIC’s revenues dropped 18.2% to $49.5m, the lowest point since 2004. Net income for 2009 fell to $1.05m compared to $4.49m in 2008.

2009 results were hurt by a $1.6m goodwill impairment charge on GPIC’s USA segment, as the company struggled along with the rest of gambling stocks during the recession.

Despite the lower sales, the company managed to generate $7.8m in operating cash flow and $4m in owner earnings.

Through the first nine months of 2010, the company is off to a great start. Revenues were $43.2m through September 30, 2010, an increase of 29% over last year’s results for the same period.

The significant increase in revenue is due to several new casino openings in Pennsylvania. In fact, second quarter results set company records for gross profit, net income, and earnings per share.

GPIC received orders from all nine new Pennsylvania casinos, a testament to their dominant position in the marketplace.

Through the third quarter, the company has generated owner earnings of $4m, already equivalent to the results for all of 2009.

Most importantly, the company’s balance sheet remains strong, with $1.53 in net cash. Book value sits at $5.14 per share.

Catalysts

International Expansion

The company recently announced its first order to Mexico, a burgeoning gambling market. They also established a sales office in Macau, now the world’s largest gambling location.

Macau’s November gambling revenue surged 42% from a year earlier to its second-highest monthly total on record. According to a report by PricewaterhouseCoopers, gross gaming revenue in Macau will increase at a CAGR of 24.7% until 2014, reaching $45B.

Several new casinos including Galaxy’s Entertainment Group’s project in Cotai (600 tables) and Sands China’s expansion project (700 tables) are expected in early 2011.

In addition, the rise of other international gambling sites such as Singapore (2 new casinos) and Vietnam (under development) will only increase the market size for GPIC.

Increased U.S. Activity

PwC also predicts that U.S. activity will start picking up in earnest by late 2011, returning to pre-recession levels by 2014.

The Association of Gaming Equipment Manufacturers (AGEM) Index shows that casino equipment stocks have risen significantly from lows in 2009, but still have quite a bit of upside to reach pre-recession levels:

AGEM - November 2010 Index

In addition to benefiting from an increase in activity in Las Vegas, Atlantic City and other traditional gambling hot-beds, GPIC will also be lifted by more open legislation in the U.S.

Currently, 19 states offer commercial casinos. With increased pressure on budgets, more state legislatures are turning towards gambling as an alternative revenue source.

Ohio recently passed a bill allowing 4 new casinos in late 2011. Other casinos are planned in Maryland and Queens, NY, with initial discussions in Massachusetts and New Hampshire.

The Illinois state senate recently passed a bill expanding existing casinos and adding new ones in and around Chicago.

Each new state that legalizes commercial gambling will increase the opportunity for GPIC’s casino chips.

IGT Deal and RFID

On August 26, 2010, the company announced a license agreement with IGT (the industry behemoth):

“covering certain high-frequency RFID rights and products including software related to a Chip Inventory System (“CIS”), a newly developed communication platform to integrate RFID data into a variety of casino management systems and a license to certain other RFID related intellectual property and assets.”

This is another example of how GPIC’s RFID technology can be used to cross-sell existing opportunities, especially through such a strong sales channel.

More and more casinos are switching over to the new high-tech chips and corresponding inventory technology. Generally, RFID chips sell at a $1.20 – $2.00 premium per chip, boosting sales and profits as the industry moves towards a new standard.

Valuation

GPIC Stock Valuation

The company current trades at a P/B value of 1.1 despite significant improvements in 2010 results.

GPIC’s 5yr – average P/B ratio is 2.3 – assigning this same multiple would equal a per share price of $11.82.

Conclusion

Insiders hold 61.8% of outstanding stock, but one director holds more than 50%, effectively controlling the company.

A new CEO, Greg Gronau took over the helm in 2009 after the retirement of the long-time leader, Gerald Charlier, and the company promoted a new CFO a few months ago.

The shakeup in management caused executive compensation to increase significantly (due to options awards for both the new and departing CEO) – normally it is very reasonable.

I’d like to see the new CEO make a commitment to the company by increasing his stake in the business.

Even so, the company has responded aggressively under the new executive leadership, soundly capturing the growth opportunities with the recent casino openings. They also launched a brand new website that looks great.

GPIC will experience some slow down in the second half of 2010 and early 2011, but the industry growth prospects remain very bright for this microcap stock.

I’m adding GPIC to the ValueUncovered portfolio at yesterday’s closing price of $5.54.

Disclosure

Long GPIC

How-To Guide for Downloading Earnings Calls

Posted December 8th, 2010. Filed under Investing Links

Many experienced investors will attest to the fact that a company’s earnings call is an important part of the due diligence process.

In this post, I’m going to walk through the different methods for accessing this resource towards my ultimate goal: downloading these calls as an .mp3 for future playback.

Earnings Call Introduction

Press releases are usually a sanitized account of the financial numbers, often cherry-picked out of a recent 10-Q.

On the other hand, earnings calls allow investors to hear management’s views straight from the source.

Generally, each call starts with prepared opening remarks, transitions into a detailed walk through of the financial numbers, and then opens up to investors for a question and answer session.

During the call, the speaker’s tone of voice, word choice, and confidence can all shine through.

The Q&A section is often the most important, as it can provide important information and explanations to help ferret out inconsistencies, determine future growth prospects, or provide more detail on the financial results.

It is a great resource for investors, but I’ve found that accessing this resource is not always as straightforward as it seems.

Time of Day

Most earnings calls last anywhere from 30-60min, with the time and date announced in conjunction with the company’s press release on quarterly results. Usually, the call happens during normal business hours.

While this might be convenient for full-time investors and traders, I’d imagine that most of you have a day job. For many, this makes it difficult to attend the live call.

Earnings Call Transcripts

One alternative is call transcripts, a word-by-word description of the entire call.

Some larger companies offer transcripts after the fact, either on the IR section of the website or from a third party source such as SeekingAlpha. Other services such as Earnings.com or Alacrastore.com offer paid transcripts ranging from $50-$75.

If there isn’t time to sit through a call, transcripts can provide a great alternative to the live event with less hassle and more flexibility.

However, transcripts often do not provide the subtle clues around tone and general feel of the call (is management upbeat and joking around? or stiff and pessimistic?)

Webcasts

If a transcript isn’t available, most companies will provide a webcast of the conference call on the IR section of their website for a period of time following the live session. An investor can register to access a streaming recording of the call through their web browser.

While useful, this method requires sitting at the computer for the length of the call.

After much testing, I finally found a better way to download the files as an .mp3, allowing me to listen to them in the car during the commute to work.

Saving Earnings Calls

Most calls are setup to stream over Windows Media Player or RealPlayer within an internet browser, not conducive for later playback.

Here are the steps I discovered for saving these calls as mp3s:

  1. Download & install VLC Media Player – an open source product, it is a powerful player capable of handling all sorts of audio and video formats
  2. Login and register for a company’s earnings call (I’m using J&J’s Q3 2010 earnings call as an example), and begin playback in Windows Media Player
  3. Right click on the Windows Media Player bottom bar, near the player controls. When the menu opens, scroll down and click on Properties.
  4. Highlight and copy the website string under “Location:” This is the streaming source that will be entered into the VLC Media Player:
  5. Conference Call Tutorial 1Open VLC, go to to the top menu under Media, and select Convert/Save.
  6. In the Open Media window, click on Network and paste the website streaming address in the Network URL field:
  7. Conference Call Tutorial 2Click on Convert / Save. On the next screen, input a destination file location with an .mp3 extension. Change the profile to “Audio – MP3” and click Start.
  8. Conference Call Tutorial 3After a brief period, the conference call should start streaming in the VLC player. Once complete, it will automatically save the call in .mp3 format that can be played back later.
  9. Transfer this call to your iPod or other music player, and perform due diligence in the car on your way to work!

Conclusion

While there seems to be a lot of steps, it is a relatively straighforward process.

Access to an iPhone or other web-enabled phone will most of this guide a moot point, as you can often register and stream the calls directly from your phone’s browser.

Some large stocks (such as J&J) even have an iPhone-enabled IR section on their website, making it extremely easy to access the files on a smartphone.

Even so, I still prefer the above method as I don’t have to actively use my dataplan while streaming the call on my phone.

If there are other methods, I’d love to hear about them. If you have any problems or suggestions, please comment below or drop me a line via email.

Disclosure

Long JNJ. Please keep in mind that some earnings calls and investors presentations are restricted and should not be reproduced. Please check the respective IR website for disclosure statements and legal information.

Weekend Values – December 5, 2010

Posted December 5th, 2010. Filed under Investing Links

As usual, here are the best investing ideas from the past few weeks:

Kirkland’s Inc (KIRK)

Baskerville Capital is quickly becoming one of my favorite blogs. Kirkland’s (KIRK) has been a stock that has been discussed by numerous value investors and featured on ValueInvestorsClub.

On the most conservative estimates, the stock appears to be worth around $12/share, with an upside closer to $20 if it is assigned a similar EV/EBITDA multiple as its competitors.

More importantly, these intrinsic values are calculated with no growth priced in – if the company opens approx. 30 new stores per year, each should add EBITDA of approx. $230k.

A few weeks ago, the stock dropped almost 20% (below $11) on lowered guidance headed into the busy fourth quarter shopping season. Since that time, it has appreciated significantly and now trades near $14.

General Motors Corp (GM)

While I spend most of my time searching and investing in obscure microcaps, I am always on the lookout for well-written research and analysis. From SumZero, this article tackles a company that is anything but obscure – GM.

After a very public bailout and corporate restructuring, the stock has emerged with a much stronger balance sheet and cost structure.

Compared to Ford (F), GM trades at a significant discount to EV/EBITDAP (3x for GM vs 4.4 for Ford), and should benefit from a gradual rise on vehicle purchases after the lows of 2008/2009.

How to Perform a Reverse Stock Valuation

In addition to having the best spreadsheets out there, Jae Jun at Old School Value has been running a series of articles on helpful ‘How-tos.” This is a detailed post on how to perform a reverse EPV valuation by one of the readers at OSV.

This is especially helpful in determining if the current market multiple is reasonable, or if the growth projections are widely overstated. It is another great way to determine if stocks are being mispriced.

Suggestions?

If you have links or suggestions to detailed analysis from other value investors, please drop me a line using the Contact Form.

I’m always open to ideas from other investors, especially for a thoughtful and well-researched investment articles.

Disclosure

No positions