Financial advisers have long said that lottery players would fare better investing their money in the stock market than hoping the pingpong balls pop up with their numbers.
If you followed that advice and bought stock in the largest lottery operator in the country, GTECH Holdings, over the past decade, chances are the investment would have paid off better about 500% better.
The West Greenwich, R.I., company's stock price has doubled in the past year, closing Friday at $42.77; GTECH's revenues have grown to nearly $1 billion annually.
Those earnings, of course, require lottery players to eschew the financial advisers and continue spending billions through GTECH-managed lotteries in their quest for a big payday.
GTECH is the company to beat when Tennessee opens the competition for the state's lottery contract. About $220 million to $240 million in annual sales is projected for Tennessee's lottery, which could be up and running next year.
A strong stock price indicates investors are confident the company will continue to dominate the number-picking lottery business. Institutional investors, like insurance companies and retirement funds, own 95% of the company's shares.
''They see the value in the business model,'' Pat Shepherd, chief executive officer of Nashville-based investment firm Avondale Partners, said of the high percentage of shares owned by institutional investors.
GTECH scored big this past week when Florida chose to negotiate with it to operate the state's online lottery, which allows customers to choose numbers for a drawing. That is new business for the company.
If the company successfully completes negotiations, it would earn 1.1489% of online lottery ticket sales in the Sunshine State.
With that deal, GTECH would operate 10 of the 14 state lotteries that have sales of at least $1 billion. Florida is one of the largest in the country with $2.7 billion in total sales, both online tickets and instant tickets. GTECH would only handle the online tickets.
Online allows players to choose numbers for a drawing. Instant games allow players to scratch cards and win or lose immediately.
Last year, total lottery sales in the United States reached about $43 billion, according to North American Association of State & Provincial Lotteries.
That is roughly $7 billion more than the total value of manufacturing output in Tennessee.
GTECH was formed in 1981 by Guy Snowden and William Y. O'Connor, both of whom were heavily involved with developing the first online computerized lottery systems in the mid-1970s. Previously, tickets were sold manually, which meant lag time and increased chances of fraud.
Now retail locations are connected via a central computer in a faster, more secure system. The number of lotteries has grown substantially since the New Hampshire and New York started ones in the 1960s. States have used them to raise revenue and deal with budget troubles.
In the 1970s, 12 states added lotteries, said Dave Gale, executive director of the lottery association. The 1980s saw the most growth with 18 states joining the lottery ranks. And six more came in the past decade.
Lottery industry officials say GTECH grew with the lotteries because it had the capital to cover the expensive startup costs of building and installing the computerized systems.
The Rhode Island company had some scandal in the 1990s. While chasing work in Texas, allegations arose of kickbacks to lobbyists there involving a former lieutenant governor of the state.
Then British billionaire Richard Branson, founder of Virgin Airlines, accused GTECH's former chief executive and founder Snowden of attempting to bribe Branson to withdraw from the competition for England's lottery.
Snowden left the company in 1998 after being convicted in London, but GTECH continues to supply equipment and services to the lottery there.
There was some management shuffling for a couple of years. O'Connor took over for a period of time.
Then Bruce Turner, a former Wall Street analyst and board member, entered in 2000 to help repair the company's reputation.
Turner returned to the board after hiring Howard Cohen in 2001 to cut costs and put the company on better financial footing.
Cohen inexplicably left after 16 months and Turner returned to pursue efforts to improve the company's sales.
GTECH operates or supplies equipment for 25 of the 39 state lotteries, including Texas.
''We're not likely to have 100%'' of the lotteries, said Robert Vincent, the company's spokesman.
There is competition for various pieces of the lottery business, but the numbers are relatively small.
''Our industry has gone through times when there were more vendors than there are today,'' Gale said. ''The industry has been around long enough that those that have good products have risen to the top.''
He said the lottery business is like any other industry that has gone through periods of consolidation. Vendors have bought competitors or they've expanded services and products through acquisition.
GTECH, for example, is buying Interlott Inc., a maker of instant ticket machines.
One of GTECH's chief competitors is Reno, Nev.-based International Game Technology, a leading maker of slot machines. That company runs several lotteries, two of which, Pennsylvania and Maryland, have sales above $1 billion.
Another competitor is New York-based Scientific Games International. It operates online lotteries in seven states and starts on South Carolina next year, which is the newest state to add a lottery. But its main source of revenue comes from operating instant scratch-off ticket systems.
Scientific Games and GTECH would have become vendors for Tennessee if state lottery officials had opted to team with Georgia. Scientific had the scratch-off contract, and GTECH, the online contract.
GTECH beat Scientific Games and IGT, the incumbent, for the Florida business after it had contested in court for five years the bid process.
These companies compete around the world, too. GTECH operates or supplies lotteries in foreign countries, including Spain, Belgium, German states, Ireland and Brazil.
Tom Graves, an equity analyst that tracks GTECH for Standard & Poor's, attributed part of the company's dominance in the United States to its focus on technology.
''I doubt any of companies out there spends as much money on R&D in the lottery services business,'' Graves said.
He said he expects the company will spend $45 million to $50 million on research and development to building better computer systems that will reduce operating costs and make the company more efficient.
Graves pointed out that the company focuses primarily on lottery services, while others have entered the business to diversify. Scientific Games and IGT bought existing lottery services companies.
''In a sense, IGT is to slot machines what GTECH is to lottery services,'' he said.
The Reno company is actually bigger than GTECH in terms of revenue and market capitalization. IGT had annual revenues last year of $1.85 billion and a market cap of $9.34 billion compared with GTECH's $2.5 billion market capitalization, the number of publicly held shares multiplied by the share price.
Most of GTECH's nearly $1 billion in revenue is generated through the lottery business. For IGT, lottery business sales were $119 million in 2002.
A new competitor entered the U.S. market this month when Intralot USA, a subsidiary of Greek gaming company Intralot S.A., beat incumbent GTECH for the Nebraska lottery, whose sales of $74 million last year are only slightly larger than the country's smallest lottery, Montana. The two were the only bidders.
Intralot was one of the two companies that threatened to sue Tennessee if it chose to partner with Georgia.
The Nebraska competition illustrates what is happening in the industry with fees. States pay the companies a percentage of lottery sales. Lottery industry officials pointed out states have been pressing for smaller fees. Small lotteries, in particular, tend to have higher percentage fees.
''That puts pressure on companies like GTECH to become more efficient and improve their cost structure,'' Graves said.
In Nebraska, Intralot and GTECH were close technically, said Brian Rockey, Nebraska lottery's spokesman.
''But over the life of the seven-year contract, the Intralot pricing saved us $28 million,'' Rockey said.
Intralot's bid sought 2.39% of sales and GTECH's bid was 12%, 1.1% higher than what it had been receiving since 1994.
''That's not a business we wanted to be in at that level,'' GTECH's Vincent said. ''We bid a premium.''
By comparison, Georgia pays GTECH 1.28% of sales, according to industry officials.
Vincent said the lottery industry doesn't have tremendous growth potential right now and sales have flattened. For GTECH, sales had declined for a few years. Over the past three years, roughly 65% of the company's revenue stream was being rebid. It won most of that and new business.
Contracts include work in Texas, Kansas, California, Georgia and many foreign countries.
GTECH has been branching out by trying to sell governments on the idea of piggybacking transaction services on the telecommunications systems used to sell lottery tickets. Most of the effort so far has been in other countries.
In Brazil, people can pay utility bills at the lottery terminals GTECH operates to boost sales in the South American country to about $100 million,
''That business is now larger than our lottery business,'' Vincent said.
Nobody has commented on this story yet.