Gambling stocks are hot - Tuesday 12th of April 2005

How's this for a payout? A $10,000 investment in Canadian land-based gambling stocks would have earned nearly $23,000, a 127% return. The same investment in Canadian e-gaming stocks in January, 2004 would have earned $35,529, a return of 255%.

Meanwhile, a $10,000 investment in the S&P TSX index would have earned $11,490, a return of just 15%.

Gambling stocks are hot globally, with Canadian players leading the way. And things appear to be getting even better, according to a report on the gaming industry by Robert Winslow, an analyst with Wellington West.

In his report, Mr. Winslow recommends three gambling stocks trading on the TSX: Great Canadian Gaming Corp. (GCD/TSX) with a $60 target price, Chartwell Technology Inc. (CWH/TSX) ($12) and FUN Technologies PLC (FUN/TSX) ($6).

He noted that Great Canadian Gaming, which operates casinos in British Columbia, has agreed to purchase Georgian Downs, an Ontario casino, and is poised to extend its racetrack holdings beyond B.C. As a result of the $48-million acquisition he increased his fiscal 2005 and 2006 estimates to $1.93 and $2.70 from $1.88 and $2.62.

Chartwell, meanwhile, is set to benefit from a recent e-gaming bill in the United Kingdom. The Gambling Bill, which received Royal assent last week, will help ensure e-gambling sites are operated fairly. This should help the valuations of legitimate companies in the sector, Mr. Winslow said. He increased Chartwell, which makes Internet gaming software, to a "strong buy" from "buy" and upped his target price to $12 from $10.50.

Although FUN Technologies, an online gambling provider, had a poor fourth quarter with revenues falling well short of estimates, Mr. Winslow said the British company could improve its fundamentals through acquisition activity. Successful execution could take the stock as high as $8, 50% above its current price.

In trading yesterday, Great Canadian Gaming closed at $53.72, up $1.60, Chartwell at $9.02, down 3 cents, and FUN Technologies at $5.35, up 35 cents.

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COOL RELATIONS Those hoping CoolBrands International Inc. will ditch its multiple voting share structure when it reports its second-quarter results today better not hold their breath.

"The market was rife with rumours that they were going to collapse the multiple voting structure into single voting structure," said Ron Mayers, a hedge fund manager at Genoa Capital Inc. "But...the company may indicate to you that that's not going to be the case in the immediate term."

Changing the share structure, which would make the company more attractive to potential suitors, "certainly remains a goal over the long term," he added.

When companies convert multiple voting shares into single voting shares, it is often a signal the company is about to be sold or an insider is preparing to exit, another market observer added.

"There are lots of reasons for this company to be sold, including ongoing dissent within management," Mr. Mayers said yesterday.

It's not a secret that there's tension between senior officials at CoolBrands, he added. Michael Serruya, co-founder and co-chairman, and Aaron Serruya, co-founder and vice-president, control about 38.4% of the company through multiple voting shares.

They don't always see eye-to-eye with David Smith, chief operating officer and vice-chairman, and Richard Smith, co-chief executive and co-chairman, who control 15.4% of the ice cream treat company through multiple voting shares, Mr. Mayers said.

"And when those things happen ... it's probably better for everybody that the company pursues ways of maximizing value so that it can be run in a profitable manner, either by someone else or by CoolBrands."

CoolBrands was not available for comment yesterday.

The fund manager said he would be "extremely surprised" if CoolBrands changed its share structure or announced that it was for sale today.

And investors seem to agree. The stock (COBsv/TSX) shed 37 cents, or about 4.6%, to close at $7.65 yesterday. This follows declines of 47 cents on Tuesday and 7 cents on Monday.

CoolBrands fell out of favour in July, 2004, when it lost the right to sell Smart Ones, a Weight Watchers International Inc. product and major source of revenue for the Markham-based company.

Before this announcement, CoolBrands was trading around $17, but the news dropped the shares to around $10 and it hasn't been able to regain ground since. CoolBrands touched a 52-week low of $6.39 in November, 2004 and a 52-week high of $26.40 in April, 2004.

With the Weight Watchers announcement, which came without warning, investors were left worrying about the security of other CoolBrands' licenses. At the time, management said about $9-billion in licenses were up for renewal over the following 12 to 15 months.

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