Description

Alliance gaming (ally) is an extremely cheap and leveraged way to play the strongly
improving demand environment for gaming machines. The company trades at a
relatively low EV/EBITDA multiple of 7.1x. More importantly, the company
has $345m in debt and $25m in equity, so a 10% increase in the enterprise
value will double the equity's value. Interest coverage is also not horrific.
EBITDA for the past 12 months was $51.7m before a $4m unusual charge, versus
interest expense of $33.6m. The company is also restructuring, including sales
of their non core businesess. Their gaming systems business is the most profitable.
This includes networked games from which they receive a portion of each coin played.
Essentially, this provides them w/the profitability of the casinos w/o the capex. Their
Betty Book, shared revenue game just received approval in Atlantic City and this should
add significantly to EBITDA. The growth in the California native american casino market
and the new replacement cycle, which is being driven by cashless machines, is a rising tide
that will lift all boats, including WMS, IGT, Aristocrat (AUS), etc.. However, ALLY has the
most upward potential.

In terms of risks, corporate governance is terrible and there is a management void.
Obviously, the debt level doesn't leave a large margin for error either.
Overall, these factors clearly contribute to the idea being more speculative, but the risk/reward
is very intact for the risk tolerant fund manager. The shares could easily exceed $10
within a few months w/a little EBITDA multiple and/or margin expansion.

Catalyst

Growth in California native american casinos, new replacement cycle brought
on by cashless games, and approval of Betty Boop game in Atlantic City.