Citing a plethora of positive economic indicators, B Riley analyst David Bain issued a favorable report on slot makers Everi and PlayAGS, which he described as “poised for strong [2022] share price gains.”
First and foremost among his reasons was a 35 percent increase in the North American slot-replacement cycle. This was augmented by the demand for new machines created by casino openings and expansions slated for this year. Continued growth in gross gaming revenue also bodes well for revenue-participation games, which both companies manufacture.
Bain described the current slot market as inflationary (possibly due to supply-chain issues), a factor working in game-makers’ favor. Even so, casino themselves were described as being in a better position to buy. Lastly, “Positive macroeconomic trends, such as higher housing values, are additional potential ‘hidden’ forward casino/leisure drivers, such as early retirement.”
While this redounds to the benefit of all slot makers, Bain particularly liked Everi and PlayAGS, not least because of their tribal clientele. “Increased buying activity has begun, particularly by certain gaming tribes with October FY year-end. … Contacts at large commercial regional casinos also indicate larger budgets geared toward slot purchases.”
Furthermore, 7,000 new slot machines will be needed by casinos debuting or expanding this year, mostly of the satellite- or temporary-casino genre.
Bain’s research shows gains for both PlayAGS and Everi as this increased buying activity continues. The latter’s product provoked strong favorable reaction at Global Gaming Expo last October and not without reason, according to Bain: “[Everi] was the only domestic-listed casino supplier with higher 3Q21 game sales than 3Q19. It also continues to lead domestic suppliers in gaming operations daily win per unit growth and unit placements, now for multiple consecutive quarters.”
As for the replacement cycle, Bain projects that 15,000 more slots will be cycled out this year compared to 2021. He estimates that being worth $225 million in revenue for suppliers and $107 million of new cash flow, at $17,000 a machine. “Based on conversations with casino operators, we believe there is recognition of a gaming-floor-led COVID rebound versus non-gaming amenities,” Bain reported. “We further gauge less than average capex toward new hotel towers/steak restaurants this year and more interest in optimizing what is working – gaming technologies on the gaming floor.”
Domestic casino income shows “stable strength,” even in the face of the omicron and delta COVID variants, Bain wrote, with “solid” gaming revenues from November persisting into December 2021. These trends “directly benefit” Everi and PlayAGS, thanks to revenue-participation games.
“Even despite the expected increase in slot sales, gaming operations should represent nearly 70% of gaming revenue for both EVRI … and AGS.” An extra bonus for Everi is its recurring fintech sector, “which is benefiting from larger average transaction size trends, according to checks.”
In addition to fintech (cashless gaming, digital wallets, cryptocurrencies), humbler product launches will also help, such as a new line of shufflers from PlayAGS. Casinos are well positioned to absorb these new products and their higher prices due to a decrease in leverage, providing additional liquidity for capital reinvestment.
“We also note supplier pricing power, even in an inflationary environment,” noted Bain. As an example, he cited a theoretical new slot that would rake in $20 of win more than an existing one, amortizing its higher price within 50 days. Even only a $5 positive differential would ameliorate the cost increase in six months of performance.
“Given EVRI and AGS outperformance with newer offerings,” Bain concluded, “we believe both have strong pricing power even if inflation persists.”
