02 December 2005

Is it time to gamble on WPTE?

Is it time to gamble on WPTE...and hedge that move with HET? Or should I forget poker tours entirely and invest in a true value and cash play, IGT?

Is WPTE priced as a value play? It's certainly near its nadir for several reasons that fool.com's Jeff Hwang discusses below:

WPT: Worth more than zero?
I tend to think of myself as being mostly indifferent with regard to WPT Enterprises (Nasdaq: WPTE), the company behind the World Poker Tour television show. But the stock has been in a freefall since Doyle Brunson's supposed takeover bid pushed the stock up to a high at $29.50 this past summer. And watching the stock hit a new low yesterday at $6.15, I just can't help but think that the stock has got to be worth more than zero.

It's Harrah's World Series of Poker vs. the World Poker Tour all the way around. But WPT is hardly alone in this battle -- its business partners have a stake in its success, as well. Really, it's Harrah's vs. everybody else on the casino front, including rival MGM Mirage, which hosts several WPT events at Borgata, The Mirage, and Bellagio. And on the slot machine front, it's International Game Technology's (NYSE: IGT) WPT slots vs. WMS' upcoming series of WSOP slot machines. On the video game poker front, it's Take-Two's WPT vs. Activision's WSOP-branded game.

In addition, WPT Online -- the company's new online gaming site and the key to the stock's upside -- now has IGT as a business partner, with the latter company's recent acquisition of WPT Online partner Wager Works.

And don't let WPT's past couple of quarterly earnings (or lack thereof) fool you: There's a legitimately profitable business here.

Last week, the company posted a wider-than-expected third-quarter loss of $1.6 million, or $0.08 per share, vs. the analyst expectation for a loss of $0.05 per share. The company also forecast light on fourth-quarter revenues, as its guidance of $4.5 million to $5 million in revenues was well short of the $8.5 million analyst estimate at the time.

WPT has taken a shot in the foot in a dispute over its Professional Poker Tour series with the Travel Channel (see WPT's PPT Saga ), which airs the WPT show. As we discussed back in September, WPT had already shot its first season of the PPT and recorded expenses for the episodes, but negotiations for the series broke down between the two parties. And apparently, WPT had a three-year deal in place with Disney's ESPN for the PPT. At that point, the Travel Channel stepped in and interfered with the deal by threatening a lawsuit. WPT countered by filing suit itself against the Travel Channel back in September.

But as a result, WPT now doesn't expect to derive domestic license revenues from the PPT in the fourth quarter. Instead, the PPT will air internationally and be used as advertising for WPT Online. Still, product licensing revenues were up 481% to $930,000 in the quarter. WPT Online generated $175,000 in revenues its debut quarter, and with marketing spending picking up, is expected to do $225,000 to $275,000 in revenues in the current fourth quarter.

And despite its shortcomings, analysts still expect the company to earn $0.39 per share next year.

While WPTE is an incredibly risky investment, I think the following problems are already priced into the stock:

Amateurish WPTE business moves driving the Professional Poker Tour from the TV to the courtroom.

The Doyle Brunson-rumored takeover fiasco over the summer that pushed the stock from $20 to $30, and back down to $20 and lower over the course of a few days.

The lull between WPT television seasons is in full swing as reruns of last season are rerun again. I have to get my tv poker fix by catching the competition, like the highlight-driven WSOP events on ESPN, or watching C-listers playing D-list quality poker on Bravo's Celebrity Poker Showdown. And then there's the poker programming on FSN, so commercial-heavy that it's unwatchable without using an ad-skipping DVR or TiVo.

A not-so-brief aside: As a viewer of the World Poker Tour, I've noticed that Travel Channel has been re-running old episodes for quite a while. Where are the new episodes? Upcoming season 4 has 16 tournaments, which means 16 episodes, 16 weeks of fresh poker. That leaves 36 weeks a year of replays as well as forcing me to suffer through some of the crap offerings on the Travel Channel. Food Network couldn't handle the piss and vinegar of Kitchen Confidential author Anthony Bourdain. Travel Channel runs his show, yet it has the Rachael Ray-patina of cheeze dripping all over, with Bourdain stretching to fill an hour program with his increasingly hammy schtick. Mark DeCarlo (I think he hosted Studs from way back in my high school days) has a crap-o-rama called Taste of America. In a Nashville segment, he mocked the Loveless Cafe owner with the tired old gag about Southerners having two first names. His host abruptly disappeared, dumping DeCarlo onto his African-American biscuit maker. Bad enough that DeCarlo sheepishly pointed out to the viewer that he was rude to his host. Things degraded further when he started talking biscuits. Sure enough, he started to ease the lilt of his voice to approximate a southern black patois.

Okay, so this train wreck was entertaining, if unintentionally so. The Travel Channel needs both WPT and PPT programming. The PPT whould fill in some of those 36 weeks of reruns, while providing higher-rated, and higher-quality entertainment than what is currently on offer.

Other issues I have with WPTE may not be priced in at $7+:

- WPT is facing fierce competition in the online poker area. WPT advertisers like FullTiltPoker.net, PokerStars, and PartyPoker are the players. WPT does not have much of an online presence in the States, and operates its internet gambling business in the UK, where it's legal. This may be a good thing, as I think various state AG's may start cracking down on internet gambling at off-shore poker sites.

- WPT established itself as the premier league/circuit for poker, likening it to a sports league like the NBA. But now it looks more like the ABA, or the NHL, after Harrah's bought the World Series of Poker. HET expanded the brand beyond a few tourneys at Binyon's Horseshoe. The WSOP now includes satellite and feeder tournaments. As everyone knows, it's aired (constantly) on ESPN, far from the digital cable ghetto where Travel Channel lies. Hwang has a point that it behooves HET's competitors to support the WPT, but do I want to invest in the dominant player, or an also-ran?

Is the poker business maturing to the point where there could be some consolidation? Could a stronger player, say one of the websites that advertises on WPT, decide to buy out the WPTE stock, not at the crazy Brunson premium, but at a premium to the current trading price? I don't want to buy a stock hoping for a takeover. Talk about a longshot gamble.

What about a safer bet? Pat Dorsey's short piece with the elegantly alliterative title, 5-Star Stocks that Spit Out Cash, cut through the stock picking bullshit in asking two questions: "Is it a decent business, and is it reasonably priced?" Among his picks, WershovenistPig Stock Watch List resident, IGT:

International Game Technology IGT
Cash Return: 6.2%
Price/Cash Flow Ratio: 12
Economic Moat: Wide
Business Risk: Average

From the Analyst Report: "We continue to believe that IGT has excellent long-term prospects. Investors willing to look beyond the near-term sluggishness will, in our view, find that the market's shortsightedness has created a compelling buying opportunity."

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