We had the opportunity today to interview Mark Roberson CEO/ CFO of PokerTek. It’s always interesting to interview CEO’s because they know so much more than I do about the sector and its related behavior … I would say generally they love what they do.
As logical as it appears, no one takes the time to call the CEO. Individual investors also have the right to call Investor Relations and be put through to the desk of the CEO. Surely there is a gatekeeper of sorts, but if you are a shareholder usually they'll put through. Many use the current web based tools to listen to the conference calls and ask questions- management can be more candid about cyclicality of their businesses as long as they know you are not just calling to annoy them ..or ask stupid questions to hear yourself talk.
Having said that, our team started to dissect (NASDAQ:PTEK). I work with some pretty smart guys and together we can usually figure out the current valuation by using some simple math. Understanding the multiples of a specific sector makes stock selection easy once you learn the mathematics behind it. Always remember that the market is the ultimate barometer . It doesn’t matter if you think a particular stock may be undervalued the market may not agree with you. It’s really easy because the stock gives you a mark to market price each day and tells you what it thinks.
Looking at PTEK it was apparent what occurred in February as a smart Sales Trader called a Gaming Technology Fund ( and I don’t know who you are but please call me) they cover to establish a position in the gaming sector and said “Listen.. I have a the final piece of the seller here to clean up …there's not much selling behind it and it is probably near the bottom of the move”.
It probably went something like this, “I can't guarantee this is the final piece… but if you want me to open up the seller for clean up I can get you started on a decent piece”. As a retired portfolio manager that's a fantastic call to get. You like to hear those calls, and you pay brokers top commission dollars to be that first call…mainly because at that moment the stock was undervalued and was for sale in a block. Volume always creates tops and bottoms in price action.
PTEK is currently being accumulated, not sure the size of the Fund but I can tell by the trading action and prints that someone is in accumulation mode and the footprint of taking down the piece February 23 around .45 cents was the first important step. I also know that the clean up piece always makes the accumulation much more interesting as you can keep your average price lower…Portfolio Managers love this scenario. The difficult part of the trade is buying on the way up (this is also occurring here in PTEK) and the trader actually become their best own best friend as they average up. This is a great plan as long as the average price isn’t breached and you avoid a large pullback or sell off during this accumulation period. Know this…. stocks spend 85% of the time preparing to move and 15% of the time moving.
Looking at the price action in PTEK helped me realize what is occurring. Our team also realized that back in February, when the acting CEO, Mark Roberson, was named permanent CEO, the stock was about 50% undervalued.
After some back of- the-envelope calculations we view the stock to be slightly undervalued today at .90 cents. I also conclude that the gaming sector will go through an upcoming consolidation with gaming stocks at current valuations there will be acquisitions in the sector based around advances in the Technology of Gaming..Historically large gaming stocks acquire smaller companies with their paper currency at expanding valuations.
The key is (regardless of who wants to buy them) is how the company plans to grow. During our questioning, Mark
brought up some interesting points. The first thing he did was logical, knowing that domestic gaming was flagging with only 10,000 licensed poker tables in the world (we found this a staggering fact) 6,000 domestic 4,000 international, a more international strategy was implemented. A market segmentation analysis was conducted and management concluded that traditional US markets were oversaturated with poker and that electronic table games such as Pokerpro perform better in less saturated, less competitive markets, including international. Mark switched the sales effort and the company started to get traction. If you look at the recent press releases they have great relationships in Mexico and they've got their eye on some other interesting international prospects. The question is how much they can grow in Q2 and Q3? Attempting to do the breakdown of the top line revenue number, we couldn't quite get our hands around how the licensing and revenue flow. We still have plenty of time to find this out. The key factor for PTEK is the rate of growth. This should be a simple metric if you read the filings. The company did the smart thing by building inventories to meet existing orders and prepping for Q2 sales avoiding expensive borrowing rates.
Back to my point about the portfolio manager…. It is my observation that he/she is still out there on a daily basis participating in the volume, increasing the funds position in PTEK and is happy that the average volume jumped from 60,000 shares to 450,000 shares. Let’s not forget that the company had recent insider buying which turns on all sorts of buy-side trading algorithms for Quant funds adding to liquidity. The best scenario for the company is that this player is a long term holder and doesn’t get spooked if they miss a quarter or two. An exit for a large holder can be equally painful.
PTEK is a$12 million market cap company who is positioned to capitalize on the growth in international gaming. The company has a new CEO who also acts as the CFO. I specifically like companies who have a numbers guy with their hand on the rudder. PokerTek will be an easy company to follow because the metrics are simple. The downside for all gaming companies is another downdraft in the global economy as this disposable income is always the first to get sliced from consumer spending. Stay tuned as we watch PTEK closely through the upcoming quarter and look forward to tally the number of tables they install around the globe. World Market Media has no position in this stock and is not paid by the company.
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