Anchor of the UG Screen

by Paul Larson
( [email protected])

Chicago, IL. (Sept. 2, 1998) -- I have to admit that I was a bit stumped when the powers that be at Fool HQ asked me to fill in here. Sure, I'm familiar with how to use the screens featured here, but enough to actually write a whole column about them?

Then I remembered that one of the stocks I follow closely, Anchor Gaming <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SLOT)") else Response.Write("(Nasdaq: SLOT)") end if %>, holds a prominent location in the current Unemotional Growth screen. In my previous capacity at the Fool, before being assigned various other duties such as this column, I exclusively covered the gaming (read: casino) industry. So while I may be far from an expert craftsman here in the workshop, I do know a thing or two about this particular stock that I can share.

For those unfamiliar with the company, let's first talk about what the company does. Anchor runs two small casinos in the Colorado towns of Cripple Creek and Blackhawk. These are very tidy businesses that combined bring in roughly $80 million a year in revenues and $30 million in operating profits. The company also runs one of the larger slot routes in the state of Nevada. This means that the company leases space for businesses such as grocery stores and taverns in order to put in slot machines. This division brings in roughly $35 million in revenue and $7 million in operating profits per year. Both the Colorado sites and the route operations are highly profitable but are low growth businesses. In short, they are cash cows.

The truly exciting division of the company is their proprietary games division. This is the part of the company that has contributed the most to the earnings growth over the past two years. This division has gone from $21.5 million in revenue in fiscal 1996 to $113.7 million in the fiscal year just ended in June. Gross margin for the division? Try 88% before SG&A expenses. The gross margin number is slightly inflated because much of the "revenue" has actually already been filtered through the company's joint venture with slot behemoth IGT <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: IGT)") else Response.Write("(NYSE: IGT)") end if %>, but it is still quite an impressive number.

Anchor has pioneered an innovative way of making money from slot machines. Instead of selling the machines to casino operators, they only lease their units. In other words, you couldn't buy an Anchor machine if you wanted to. While bypassing an initial large sale, the company rakes in daily rent for many months (or years) that far surpasses what they could have sold the machine for. These machines are called "participation" machines because the slot manufacturer "participates" in the success or failure of the products they design. Design a bum machine and no casino will rent it. Design a smashing success, as Anchor has repeatedly been able to do, and the money comes flowing in.

The company has also had the fortune to design some of the best-played machines ever to hit the casino floor. Anchor owns the patent to the "wheel on top of a slot machine" idea and has been able to dramatically capitalize on it. Such machines as Wheel of Gold, Safe Buster, and the huge hit Wheel of Fortune utilize this patent. Yes, you guessed right, the Wheel of Fortune machine is based on the popular television show.

So now that we've discussed what the company does, let's take a look at how the company scores in some of the tools we have lying around here in the workshop. Of course, the company made the Unemotional Growth rankings by not only having a superior EPS ranking, but by also being ranked 1 for timeliness in the Value Line Investment Survey.

Looking at the current database, you can see that Anchor has an EPS Percentile Ranking of 99 yet only has a Relative Strength Percentile Ranking of 28. Needless to say, the stock price has not been able to keep pace with the fundamental improvement in the company's business. The company's P/E has been hit with a nasty case of the "contraction" blues. Anchor now trades at 10x trailing earnings even though it has been able to nearly double its earnings over the past year and is expected to see 13% earnings growth this year.

I'm running a bit long here, so I'll leave going more deeply into the company's numbers to next Wednesday, when I'll be scribing this column again. Of course, if you have any sort of feedback to share regarding things you like or don't like about what we're doing with this column, don't be shy to let your feelings be known in the workshop message board. You can even email the crack workshop team if you have some ideas of what you'd like to see covered here. Like the focusing I did on Anchor today and Louis Corrigan did with American Woodmark <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: AMWD)") else Response.Write("(Nasdaq: AMWD)") end if %> yesterday? Think we stunk up the joint? Let us know! We're here to serve YOU, Fool!

See you next Wednesday....

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