Wall Street's poker gamble: All-in with WPT

Poker may not seem as hip as it was just a few years ago. And nobody's feeling that more than shareholders of WPT Enterprises, operator of the World Poker Tour.

Wall Street has pretty much cashed in all its chips on WPT over the past few years. The stock, which hit an all-time high of $29.50 in 2005 on merger speculation, has since sunk to about $5.

A group of investors led by poker legend Doyle Brunson made an offer to buy the company in 2005, but the takeover overture turned out to be a, uh, bluff. WPT then hired investment bank Thomas Weisel last February to explore the possibility of a sale, only to have the company announce in September that it had decided to remain independent.

But some analysts think that the company is now a good bet.

Hedge fund manager holds the right cards

WPT reported fourth-quarter numbers after the close Monday, and the results were mixed: sales jumped 13 percent, but the company reported a loss of 5 cents a share, larger than analysts were expecting. Wall Street also expects WPT to post a loss of 4 cents a share for all of 2007.

Still, the company, which generates the majority of its sales from domestic television licensing revenue - World Poker Tour and Professional Poker Tour shows air on the Discovery Holding -owned Travel Channel - hopes to become a winning hand with investors once again thanks to the relaunch of its online poker site later this year.

Clint Morrison, an analyst with Feltl & Co., a Minneapolis-based investment bank, said the company's first online poker site - which is only available to consumers outside of the U.S. since Internet gambling is illegal here - has not been as big a success for WPT as the company originally hoped.

That's because the site, which was run by a third party, had several technical problems and often crashed. Morrison said the company has learned from its past mistakes and invested heavily in software to develop a new site that it should roll out sometime in the second quarter of this year.

And even without the prospect of getting money from U.S. poker junkies, Morrison still thinks that WPT could do well with a new site since online poker is about a $1 billion market globally.

"The whole story is going to be WPT bringing up their new online poker site. That's where the real growth and the upside for the stock is. They should be able to leverage a strong brand in what is a large and profitable market," Morrison said.
Kicking the urge to lose money

To that end, despite the glitches on the first WPT online poker site, revenue from online gambling has already become an increasingly important part of the company's overall financial health. WPT generated $3.2 million in online gaming sales during 2006, more than 10 percent of the company's total revenue.

And one fund manager who owns shares of the company thinks that online poker could wind up being a much bigger revenue and profit generator once the new site kicks in.

"If they can just get a small piece of the online gaming market, it could be big for WPT. With their brand name and presence you would think they should be able to do really well," said Daniel Perkins, co-manager of the Perkins Discovery fund. "If they can get just 2 percent of the online gaming market, that could mean $20 million in sales and maybe they can do a lot better than that."

To put the $20 million figure in perspective, WPT is expected to generate just about $28 million in total sales in 2007.

However, WPT's decision to go it alone in online gaming also means more risks for the company. Traci Mangini, an analyst with ThinkEquity Partners, wrote in a recent report that she would prefer to see WPT partner with other poker companies on an online network in order to reduce costs.

"Given the capital-intensive nature and technical expertise needed to develop the network in-house, we continue to believe that this is not the best course of action for the company," she wrote.

"While joining a poker network does mean it must share revenues [typically 20-25 percent of the rake], we believe the benefits of immediate player liquidity, faster ramp up, and elimination of significant costs [capital expenditures and technical expertise needed to build and maintain the site] outweigh the loss of control and ability to retain 100 percent of revenues," Mangini said.

Morrison concedes that profits will probably take a hit in 2007 as the company invests in the new site. But he thinks that will be worth it in the long run.