Non-Tech
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PDS FINANCIAL or How to make REAL MONEY in slots
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| An SI Board Since June 1998 |
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PDSF |
| Emcee:
Quilty
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Type:
Unmoderated
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PDS Financial is the premier lessor of gaming equipment, namely slot machines, and controls the market for reconditioned games, a new business that's growing like a weed. Slots represent upwards of 60% of a typical casino's revenue. PDS is licensed as a gaming equipment distributor in Nevada, New Jersey, Colorado, Iowa and Minnesota, and is likely to receive the thumbs-up from Mississippi in the near term.
Over the past year, the company has transformed itself from a gaming equipment and project financing outfit into a buyer and seller of slot machines with refurbishing and financing capabilities. The trend towards leasing in the gaming industry has several key supports: heightened competition, higher ASPs (average selling prices) for new slots, growth of regional markets, and efforts among casino slot managers to distinguish their gaming floors by shifting and upgrading their selection without making large capital expenditures. Slots make sense as leased assets: they are highly regulated, technologically stable, and have long useful lives. Remember the Maytag Man, bored with nothing to fix? That's often the case with slot machines. But the push to upgrade at the top creates opportunities below.
PDS facilitates this movement in two ways: direct purchases of new machines from manufacturers, and by buying used slots from top-tier casinos like the Mirage, refurbishing the equipment, and moving it---through leasing arrangements or outright sales---along the industry food chain: to second-tier players, Indian Reservations, cruise ships and, eventually, into the international markets. The company earns a nice vigorish on each transaction. This emerging business is handled through two divisions, SlotSource and SlotLease, and any competitors who may emerge will face a difficult time reproducing PDS's industry connections, in-depth knowledge of the used and refurbished markets, service and financing expertise, and importantly, their possession of gaming licenses. The sum of these factors create a formidable moat around PDS's franchise.
I have made two trips to Las Vegas since January, visited at length with management (who collectively hold over 50% of the stock) and queried customers and prospective customers. There is no comparable source of used slots or leasing arrangements in the gaming market. Traditional leasing companies like GE Capital are not likely to pursue gaming licenses to enter this business. Slot manufacturers are less inclined to leasing arrangements, which work against unit sales; meanwhile, PDS can offer customers a complete array of machines, not unlike Charles Schwab's OneSource program of mutual funds.
Management is a veritable dream team, especially impressive given the miniscule market cap. Key hires over the last year include Jack Whitty, heading up refurbishment, and Mary Revering, both with long tenures at IGT. In fact, Mary Revering's father, "Bud" Russell, was the former head of IGT and now serves on the board of directors. Additionaly, PDS has hired Lon Shepard who was an investigator with the Nevada Gaming Control Board and, more recently, with BankAmerica and First Security Bank specializing in off-balance sheet financing for the gaming industry. Other additions to PDS's ranks have come from management positions at Williams and Sigma Gaming.
Last year's revenue totaled $47 million. Earnings were .28, up from .10 in '96. This year expectations are for .52 cents. Next year $1 seems very achievable. Thus, with a market cap of less than $30 million (and '97 EBIDA of $14.4 million!) PDSF looks ridiculously cheap, given its tremendous growth. THe company has moved to capitalize on a highly lucrative leasing niche virtually by itself. Warren Buffett says investors should look to buy great businesses at good prices. PDS Financial seems to represent the rare combination of a great business at a great price.
In the interest of full disclosure, I own a substantial position here,
acquired at prices ranging from $5 3/4 to 9 5/8. I will be glad to answer any questions that I can, but I encourage anyone interested to perform their own due diligence and to share their thoughts on this thread.
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