Online gambling-to-retail transaction processor Optimal Payments (OPAY:AIM) offers an interesting growth play on the US gambling market. As the American opportunity unfurls investors may expect to see earnings upgrades and given the highly operationally geared nature of the business only a small increase in sales could translate into a big profit advance.

Several US states have now legalised online gambling which is one of the main opportunities for the £750 million cap e-commerce specialist. The next could be California which is one of the world’s biggest economies and would therefore be a significant share price catalyst for stocks with direct exposure to the US sector like Optimal. Given the past experience of US online gambling, when a 2006 ban laid the sector low, investors will take comfort from the knowledge that chief executive officer (CEO) Joel Leonoff has taken steps to diversify the business since joining in 2011.

Based on Numis’ forecast earnings per share of 27.9c, equivalent to 16.7p at the present $1.67 to the pound, Optimal trades on a punchy 28-times rating at the current 461p share price. That looks expensive, but only if you don’t believe that earnings won’t be upgraded when the company unveils it finals later this month (28 Mar). It is also a reasonable rating given the growth prospects are not out of kilter with those enjoyed by other fast-growing scalable internet businesses.

Despite the past history of missing earnings estimates, the company has restored market credibility thanks to management shrewdly under-promising and over-delivering, which has resulted in a number of earnings upgrades in the past year. Following last month’s conversion into equity of outstanding loan stock the business is debt free and Numis is forecasting it to have exited 2013 with $88 million cash on the balance sheet, although about three quarters of this is client monies so is not at the company’s disposal.

To give a measure of the potential to surprise it’s worth considering that revenues increased by a compound annual growth rate of 42% in the three years between 2009 and 2012, and yet Numis is only forecasting a CAGR of 12% in the next two, from 2013’s anticipated £245.4 million outcome, to 2015’s expected $310.3 million top line.

Leonoff, who reversed Optimal into what was NEOVIA in 2011, is considered to be an entrepreneurial leader and ‘visionary’ with a proven track record serving as a CEO, chief operating officer and chief financial officer of private and publicly-traded companies, including PartyGaming, as merged with Bwin Interactive Entertainment in 2011 to form Bwin.Party (BPTY) (see Plays, Shares 27 Feb). He has invested heavily in mobile payments functionality and more robust payment-related services for the revived US online gaming market.

The company is quite reliant on Leonoff and chief financial officer Keith Butcher and the chance of either director leaving represents a significant risk. And while the cash pile offers some security, the funds which are not tied up in client monies are likely to be employed to make an acquisition. The business must demonstrate it can strike the right deal, not overpay and execute an integration plan without any setbacks.

SHARES SAYS: A small fast-growing player in a very large industry which demands attention.

THE WRITER HAS A HOLDING IN THE COMPANY