Analyst recommends slot machine makers

Add JPMorgan gaming analyst Joe Greff to the list of Wall Street researchers who believe the best bets for gambling sector investors are slot machine manufacturers rather than casino operators.

Greff spent almost two days recently meeting with slot machine manufacturing executives and touring MGM Mirage’s $8.5 billion CityCenter development, which opens in December.

He came away with recommendations for International Game Technology, Bally Technologies and WMS Industries given that casino operators might free up dollars to buy new slot machines next year.

“In a nutshell, we think the better near-term risk-rewards are in the gaming equipment space,” Greff told investors this morning. “We think this year’s Global Gaming Expo in November (in Las Vegas) will be a positive catalyst for all three stocks.”

Several states, looking at gaming expansion as a way of shore up budget deficits will also drive up the companies’ near-term valuations.

That doesn’t mean Greff is discounting casino operators.

Las Vegas Sands Corp., he said, has several positive indicators, including momentum in Macau and an initial public offering on the Hong Kong Stock Exchange by the end of the year.

“That should improve liquidity and solidify its balance sheet,” Greff said.

MGM Mirage is facing low expectations, but Greff came away from his CityCenter tour with the belief it will be a new must-see property that should drive visitation volumes to the Strip next year.

“As far as trends on the Strip, we think that room rates will continue to get less bad as we transition from the summer to the more seasonally important fall period,” Greff said.

As for regional operators Ameristar Casinos, Pinnacle Entertainment and Penn National Gaming, Greff said the companies’ stock prices seem “stuck in narrow trading ranges.”

Penn, he said, is pursuing expansion opportunities in Pennsylvania, West Virginia, Ohio and Kansas.

Greff downgraded Boyd Gaming Corp., saying the company is challenged by a very slow recovery to the Las Vegas locals market, soft results regionally, and competitive pressures in Atlantic City and Indiana.