Fructivore Investments

The comparisons between Wall Street and a casino predate the current financial situation by decades. I, of course, have an interest in casinos of all kinds, as shown by my approval of various Indian casino bonds. And now, I have found an enticing opportunity in a casino supplier.

Gaming Partners International (GPIC) is the largest supplier of casino products. Its biggest product by far is casino chips, which represent roughly 2/3 of total sales. The company’s premier product line is chips embedded with RFID devices to enable easy counting and tracking, and of course to identify counterfeit or stolen chips with ease. Gaming Partners is the exclusive licensee of the major technology behind these chips, although the patent does expire in 2015. The company also holds several other patents pertaining to chip production.

The firm’s other product lines include quality playing cards, casino furniture and table layouts, dice, and accessory products like card shufflers and, interestingly enough, a device that can be integrated into casino tables that blows the smell of customers away from dealers (a vital service, as most casinos allow smoking).

The company reports that its future growth opportunities may be constrained, as new casino openings, which require a large consignment of chips, are likely to diminish in these uncertain times, and of course casinos are, like anyone, attempting to stretch out the lifespan of their current capital allocations. It is unfortunate, then, that playing cards, which have a lifespan of twenty-four hours, or dice, which have a lifespan of only eight, do not represent a larger proportion of the company’s total sales than the 8% and 4% respective proportions that they do now. However, in the first quarter of 2011 the company achieved very attractive results from a large contract from the Galaxy Macau casino, which opened in May of this year.

Turning now to the figures, Gaming Partners’ balance sheet is highly attractive. Out of a market cap of $59 million, the company boasts $30.7 million in cash and securities. The company’s noncash assets total $16.3 million. The current liabilities include $7.1 million in debts that fell due in June and a further $6.7 million in accrued liabilities, mainly salary. Taking these away from the cash position leaves $16.9 million. The other current liabilities consist of $2.8 million in accounts payable and $3.2 million in customer deposits (meaning that the Gaming Partners already has the money and now has to perform on its contracts to recognize the income). At any rate, these current liabilities are well covered by noncash current assets, meaning that the remaining $16.9 million in cash and securities may be considered excess. This means that the market value of Gaming Partners’s capital assets is $42 million.

In terms of income, Gaming Partners’ sales for fiscal year 2010 were $59.9 million. Reported operating income was $6.4 million, and excess depreciation was $1 million, producing operating cash flow of $7.3 million (due to rounding). After interest expense of $23 thousand, we are left with $7.3 million in pretax free cash flows to equity, or $4.8 million after estimated taxes of 35%. This represents a free cash flow yield on capital assets of 11.4%. Of course, it should be noted that this calculation treats the excess depreciation as taxable when legally it is not. This would serve to raise the free cash flow for the year by $0.3 million.

In 2009, sales were $49.5 million, and operating income (net of a goodwill impairment) was $2.8 million. Excess depreciation was $1.4 million, producing operating cash flow of $4.1 million. After interest expenses of $102 thousand, we have $4 million in pretax cash flow, or $2.6 million after taxes.

In 2008, sales were $60.5 million, operating income (net of impairments) was $5.5 million, excess depreciation was $1.1 million, producing operating cash flow of $6.6 million. After interest of $137 thousand, we have pretax cash flow of $6.4 million, or $4.2 million after taxes.

In 2007, sales were $58.8 million, operating income was $0.9 million, and in this year capital expenditures exceeded depreciation by $0.2 million, producing operating cash flows of $0.7 million. After interest of $190 thousand, the company produced $0.5 million in pretax income, or $0.3 million in after tax income.

In 2006, sales were $74 million, and operating income was $8.5 million. Capital expenditures were high this year, exceeding depreciation charges by $2.8 million, producing operating cash flow of $5.7 million. Interest expense came to $175 thousand, leaving $5.5 million in pretax cash flow, or $3.6 million in free cash flow.

It does seem that Gaming Partners has been able to reduce its capital expenditures in accordance with the current level of business. Furthermore, the $7.1 million in current debts I mentioned above constitutes the last major piece of debt that the company has outstanding, and SEC filings do not suggest any intention to issue new debt. There is a further complication in the form of expiring patents and licenses, although I should point out that the company initially valued its intellectual property at only $915 thousand, so it may be that the company’s profitability may spring from other advantages than the patents.

At any rate, if the current level of capital expenditures can be maintained, or would increase only in response to increased demand, Gaming Partners offers a free cash flow yield that makes it an attractive candidate for portfolio inclusion.

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Investing by grocca