Gaming insider: Potential in Midwest has game makers smiling

Executives with Nevada's major slot machine manufacturers oftentimes wonder if they will ever sell another game.

The recession zapped sales figures for several years. Casino operators made due with older games rather than spend money on newer gambling equipment.

Many potential casino jurisdictions were slow to gain approvals from state lawmakers and local governments. Meanwhile, lenders were reluctant to fund new casino projects.

Janney Montgomery Scott gaming analyst Brian McGill, however, said there is now a light at the end of the tunnel. He recently updated supply forecasts for the next two years to take into account new markets and expansion opportunities in North America.

The result?

"Calendar 2012 is on track to be the best year for the pipeline that the industry has seen since 2009," McGill said. "While certainly positive for all of the equipment manufacturers, this dynamic is also well understood by investors."

McGill boosted the prospects for 2013 as well. He doubled the number of potential new-game sales because two markets, Illinois and Ohio, appear to be in a much better position than they were a few months ago.

The news could be good for Bally Technologies and WMS Industries, but McGill made special mention toward International Game Technology, which stands to benefit from the upcoming Canadian slot machine-like video lottery terminal replacement cycle as well as opportunities to sell games in international markets.

"IGT will benefit from the new slot supply that is set to ship over the next two years," McGill said. "It is possible for further delays towards the end of this calendar year, but it would just be a matter of which quarter the games are recognized in during fiscal year 2013."

Casino expansion is under way or in the discussion stages in several markets, including Massachusetts, Maryland, Florida and Kentucky.

Ohio and Illinois, however, offer the most tangible and quickest sales prospects for the slot machine industry. Still, both markets have their problems.

In Ohio, the state is seeking to speed along the process of installing some 17,500 video lottery terminals at seven racetracks. A lawsuit is pending and could delay the process several months, or indefinitely, if it is decided that a statewide referendum is needed.

The only issue surrounding the Illinois Video Gaming Act is whether Chicago will opt in. Mayor Rahm Emanuel prefers a land-based casino in the city as opposed to slot machines at bars. Without Chicago, it's estimated Illinois could represent 15,000 games. When including Chicago, the estimate is up to 30,000 games.

"We expect that (Emanuel) will again make a push during this year's legislative session," McGill said. "This is likely to delay any decision in Chicago over opting into the games, in our opinion. The Ohio racetrack issue has gained momentum of late and could potentially see a resolution by Memorial Day."

Both Ohio and Illinois provide a quicker positive impact to slot machine makers than Massachusetts, where three full-scale casinos and a smaller slot machine parlor were legalized last year, but are unlikely to open until 2015.

"This highlights our concerns with the 2013 and 2014 pipelines dropping off from current levels, without the aid of Illinois and Ohio," McGill said.

IGT, which has corporate offices in both Reno and Las Vegas, has much better prospects than the competition. The company will be sending slot machines to two of Ohio's planned four stand-alone casinos scheduled to open this year -- Caesars Entertainment Corp.'s Horseshoe Cleveland and Penn National Gaming's Hollywood Toledo.

Meanwhile, IGT will have a major presence in the Canadian video lottery terminal market. IGT has already been awarded 10,000 games from provincial lotteries in Alberta, Manitoba and Saskatchewan. McGill believes the figure could increase to between 12,400 and 14,000 games shipped during fiscal years 2013 and 2014.

In financial reports, IGT has identified the international segment as an opportunity to grow over the next several years.

"By customizing content for the specific local markets, IGT believes it has substantial room to gain share in several places," McGill said. "We would look for increased shipments to both Asia and Latin America going forward."

There seems to be more upside in the slot machine market.

"This is in stark contrast to the position some industry participants were in 18 months ago, when expectations were high and results were about to slow down dramatically," McGill said.