AGEM Index

Officially spanning more than two years, the latest economic recovery cycle seems to follow the path of a carousel at times. During this same period, the proliferation of gaming has continued to explode, yet the stock prices of global gaming suppliers are treated like minor beneficiaries. Coupled with stagnant job growth and protests on Wall Street, investors took notice of waning confidence levels by sending most sectors south, including global gaming manufacturers.

During the month of September, the markets pushed the AGEM Index back six months, causing it to take its largest one-month fall in more than a year. Declining by 8.18 points or 7.2 percent, the index of 17 global gaming suppliers ended the month at 105.80. Only four companies reported monthly gains in their stock price, three of which are located in markets outside the United States. Selected positive contributors to the index during the month included the following:

• Lottomatica (LTO) reported a 6.81-percent gain in its stock valuation, contributing 0.07 points to the index.
• Intralot (INLOT) contributed 0.03 points to the index, sourced to a 8.75-percent increase in its stock price.

Selected negative contributors to the index included:

• Konami (KNM) reported a decline of 8.99 percent in its stock price, removing 2.93 points from the index.
• International Game Technology (IGT) contributed negative 1.44 points to the index as its stock valuation fell 4.78 percent.

For several months, the AGEM Index outperformed the broader equities markets in the United States, but as fears of another recession mount, pullbacks have materialized in almost every sector, including global gaming suppliers. For the month of September, the Dow Jones Industrial Average declined 6 percent, Standard & Poor’s 500 Index fell 7.2 percent, and the NASDAQ Composite slipped nearly 6.4 percent. Elevated unemployment levels in the U.S., a widening trade gap and a worsening eurozone debt crisis will continue to put pressure on global markets.

Uncertainty leads to hesitation, hesitation leads to volatility, and volatility disrupts—a financial market’s adage that seems custom fit for the gaming sector during the last three years. While the entire global economy was shocked in 2008, confidence has yet to return to levels even close to historical norms. This reality notwithstanding, gaming operators have been reporting positive gains amid growth in the broader tourism industry for more than 12 months. As casino operators slowly restock their labor forces, industry performance metrics clearly point to improved performance. Nonetheless, disruptions at the micro and macro level continue to weigh down on valuations for gaming manufacturers.

Notably, global gaming suppliers are probably better positioned to take advantage of an expanding market than they have ever been. Focusing on core competencies and trimming fat while pushing forward with innovation has been the focal point for many during the latest downturn. That said, prior quarter earnings from a few larger gaming manufacturers continue to shed light on their uphill battle of convincing gaming operators to reinstate normalized machine replacement cycles.

Aristocrat Leisure Limited reported modest gains in Australia and Japan during the first six months of the year, but its largest market in terms of revenue continued to retract. Revenue from North America pulled back 23.7 percent compared to the same period in 2010, due to “continued soft economic conditions and weak operator capital spend.”

Bally Technologies has faced similar hardship in the U.S. and Canada, where 8,455 replacement units were sold in fiscal year 2011, a decline of 5.1 percent from 2010 and down significantly from the 13,032 replacement units sold in fiscal year 2009.

Moreover, WMS Industries’ latest 10-K noted no leading indicators show “any significant increase in replacement demand for the rest of calendar 2011 or calendar 2012.” While this certainly isn’t a positive outlook, it may suggest gaming manufacturers are seeeking out opportunities, instead of waiting for macroeconomic conditions and existing casino capital budgets to improve.

On a positive note, WMS and IGT have increased new units sold in international markets over the last year. It’s likely overseas markets are going to continue to be a bright spot as gaming demand throughout Asia and Europe grows. This is evident in global gaming suppliers’ opening of new international offices and anecdotal evidence from G2E earlier this month, where MGM Chairman and Chief Executive Officer Jim Murren said he expects “two or three” additional gaming markets to open in Asia.

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