Gambling Technology Stocks Short or Long: Pick ‘em (BYI, IGT, BYD, WMS, SHFL, ZNGA, FB)

In our report on short interest in casino stocks, we noted a drop in short interest at one company that makes gaming machines, International Game Technology (NYSE: IGT). In addition to slot machines, IGT — like competitors Bally Technologies Inc. (NYSE: BYI), Boyd Gaming Corp. (NYSE: BYD), WMS Industries Inc. (NYSE: WMS) and Shuffle Master Inc. (NASDAQ: SHFL) — is preparing for an expected legalization of online gambling. Zynga Inc. (NASDAQ: ZNGA) and its play-for-fun casino games at Facebook Inc. (NASDAQ: FB) also figure in the mix.

So far four companies, including Bally, IGT and Shuffle Master have received licenses to operate online gambling in Nevada. Today Bally was upgraded to Buy at Brean Murray, not least based on the company’s positioning in what many believe will be a $5 billion online gambling industry by 2015.

Why then did short interest in Bally jump nearly 40% in the two weeks to August 15? The company beat earnings and revenue estimates in its latest quarter and the target price remains about 25% higher than the current share price. And what about short interest on the other gambling technology companies? Here’s a quick look.

As noted earlier, Bally’s short interest rose 40% to 6 million shares, and 14.2% of the company’s float is now short.

Short interest in Boyd Gaming fell 1.7% to 10.5 million shares, or 19% of the company’s float.

IGT’s short interest fell 6.4% to 14.7 million shares, or 5.5% of the float.

Short interest in WMS rose 7.2% to 6.4 million shares, or 11.8% of the company’s float.

Shuffle Master’s short interest fell 15.7% to 2.25 million shares, or 4.7% of the company’s float.

Short interest in Zynga fell 39% to 19.3 million shares, or 12.2% of the company’s float.

Zynga aside, only three of these companies trade more than 1 million shares daily on a 3-month average: IGT, WMS and Boyd. Short interest in all but two — IGT and Shuffle Master — is around 12% or more.

There are a couple of possibilities for Bally’s stock. One is that a short squeeze could push the shares higher, although based on today’s price movement that might not be in the cards. Another is that fragmented, state-by-state application of online gambling will encourage competition from small companies that do not need large profits to succeed.

In other words, Bally, IGT, Zynga and the rest need federally-approved, nationwide gambling to make reasonable profits. Chances of that happening before the next Congress are pretty slim. Thus, being short on gaming technology stocks makes sense.

Bally’s shares are down 0.4% this morning, at $44.35 in a 52-week range of $24.74 t o$49.32. Thomson Reuters has a consensus target price for the stock of $54.08.

Paul Ausick