Take me to the river

NEW YORK (CNN/Money) ? Admit it. You've succumbed to the poker craze. You want to be the next Chris Moneymaker or Annie Duke. You fantasize about bluffing your way to a big pot against Hollywood poker aficionados like Ben Affleck.

Poker is hot, particularly the game known as Texas Hold'em, thanks to TV shows like ESPN's "World Series of Poker" and Bravo's "Celebrity Poker Showdown".

But perhaps the most successful poker series of them all is the "World Poker Tour," airing on the Travel Channel. The show, which features top poker players in tournaments around the globe, started airing in 2003 and its third season began last month. A fourth season is in the works.

And since poker has become such a cultural juggernaut, it should be no surprise that the game is also "the nuts" (that's lingo for the best hand for you poker newbies) on Wall Street.

WPT Enterprises (Research), the company that runs the World Poker Tour, went public last August, as a spin-off of casino operator Lakes Entertainment (Research), and shares have more than doubled since the IPO. So should investors wager on WPT or check the bet?
Online gaming the ace up WPT's sleeve?

The company is tiny, but rapidly growing. WPT reported fourth quarter revenues of $5.7 million in March, up from sales of just $317,000 in the same period a year ago. It posted a loss of 2 cents per share in the quarter, however.

For now, WPT generates the vast majority of its sales from television and product licensing fees. But one analyst that follows the stock said investors are excited about the possibility of WPT hitting it big from online gaming.

"This is a major new revenue stream that has helped support the stock at current levels," said Dennis Nielsen, an analyst with Feltl & Company, a Minneapolis-based investment bank.

WPT launched a beta version of a poker Web site -- WPTOnline.com -- earlier this year. Later this year, international card sharks will be able to go there to play poker for money.

Betting online is illegal in the United States, however, and WPT spokesman Gus Okwu said that software will prevent bets from markets where online gambling is prohibited. He added that the company would mainly promote the site on international broadcasts of the World Poker Tour.

Nielsen said he is conservatively estimating that WPT will generate about $2 million in sales from the online poker room this year. Overall, he thinks WPT will post about $25 million in total revenues and earnings of 13 cents per share.

Only one other Wall Street analyst follows the stock and the "consensus" estimate for WPT is a profit of 18 cents a share in 2005 and sales of $26.8 million. Based on that, the stock is trading at a price/earnings ratio of nearly 90 and a price/sales ratio of 11...multiples that should give even the most skilled poker player reason to pause.

That's because even if poker doesn't turn out to be a fad that eventually burns out, there are still many risks in the stock that are worth noting.
Mucking this hand makes sense

For one, short sellers, investors who think that a stock is going to fall in the near-term, have pegged shares of WPT as an easy mark.

According to figures from the Nasdaq, more than 40 percent of WPT's available shares outstanding, or float, were owned by short sellers as of early March, an extremely high amount. At the very least, this could contribute to volatility in the stock.

Nielsen also noted that some insiders, including CEO Steve Lipscomb, have sold sizable amount of shares lately.

Finally, it's uncertain whether online poker will ever be a huge generator of profits for WPT. There is plenty of competition and the size of the market is limited by the U.S. restriction.

"The valuation for this stock and optimism is based on expectations for success in online gaming. But attempting to quantify that is difficult so there is certainly some risk because of that," said Nielsen.

The other analyst that formally follows WPT, Nicholas Danna with Sterne Agee & Leach in Birmingham, Alabama, estimates however that the online poker market outside of the U.S. could be worth about $600 million this year and that it could double next year. So even if WPT gets a small piece of this, it should increase earnings substantially, he said.

Still, until WPT can show that online poker can be a royal flush of earnings, WPT is essentially an overpriced media company, said Todd Campbell, president of E.B. Capital Markets, an independent research firm catering to institutional clients. He thinks that instead of investing in WPT, the better way to play the poker trend is to invest in casino companies.

"Without a doubt, poker is driving U.S. tourists to Las Vegas, Atlantic City and river boats," Campbell said. "A safer bet, pun intended, is to invest in actual casinos."

So it looks like a decision to buy WPT now would be equivalent to calling before the flop with a 2-7 offsuit. In other words, a pretty foolish thing to do since that's the worst possible hand in poker.

For a look at casino stocks, click here.

For a look at how to profit on gambling and other baby boomer trends, click here.

Analysts quoted in this story do not own shares of WPT Enterprises. Feltl & Co. was one of the underwriters of WPT's IPO but other firms do not have banking ties to WPT.

By Paul R. La Monica

News Added: 14 April, 2005

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