IGT Worth A Gamble

By Ryan C. Fuhrmann | March 29, 2012 AAA

International Game Technology (NYSE:IGT) used to dominate the market for selling slot machines and related gaming machines. A couple of smaller, more nimble competitors have steadily eaten into its lead, but IGT still remains the largest player in the industry. A couple of favorable tailwinds are emerging in the domestic gambling space, and could help IGT boost its growth to levels not seen for several years now.

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Company Overview
International Game Technology sells gambling games to casinos across the world. These best qualify as slot machines, but these days include a wide array of games that are hooked up to a central server that can be quickly updated and tracked to keep the action going. These include video reel, spinning reel and video poker games based on popular shows such as American Idol, Wheel of Fortune and Sex and the City, and films such as Ghostbusters. As of the end of last year, IGT boasted an installed base of nearly 54,000 units. North America accounts for the vast majority of sales and represented 76% of 2011 revenues of nearly $2 billion.

SEE: The Evolution Of The Gaming Market

Recent Results and Outlook
IGT recently reported third quarter results. Total revenues advanced a healthy 9% to $533 million. Its gaming operations comprised 56.5% of the total top line and grew nearly 13%. This unit consists of providing gaming devices to casino operators such as MGM Resorts (NYSE:MGM), Boyd Gaming (NYSE:BYD) and Caesars (Nasdaq:CZR), with 81% made up of variable revenue where IGT gets a percentage of the wagers gamblers place on its machines. The rest is made up of the sale of gaming equipment, parts and related services. This unit grew a much more modest 4.5%.

Despite the strong sales growth, net income was nearly cut in half to $46.6 million, or 16 cents per diluted share. Acquisition charges of $26 million accounted for most of the drop and management estimated recurring earnings fell by a much more modest 12% to 23 cents per diluted share. For the full year, IGT estimates adjusted earnings of between 98 cents and $1.04 per share. Analysts currently project sales growth above 7% and total sales of $2.1 billion.

SEE: How To Decode A Company's Earnings Reports

The Bottom Line
With a majority of sales close to home, IGT is going to be influenced by local gambling demand trends. The economic downturn proved that the gaming industry is cyclical and Las Vegas saw a significant drop in gambling volume and tourism. Gamblers are returning slowly, but there is solid upside, as local and state governments across the United States are turning to opening casinos to create jobs and shore up their tax bases. IGT has also aggressively beefed up its online gaming operations and could benefit greatly if gambling via the Internet is legalized by state or the federal government.

There is also potential for more international exposure. Asia represents the fastest growing region and Macao, a special region designated for gambling in China, is now the largest gambling town in the world. IGT has seen increased competition in recent years from archrivals Bally Technologies (NYSE:BYI) and WMS Industries (NYSE:WMS), but is still larger than these two firms combined.

SEE: Top 6 Factors That Drive Investment In China

Operational upside exists as new casinos open domestically. IGT also trades at a very reasonable forward earnings multiple of just over 11. It also sports a decent current dividend yield of 2.2%. The company has significantly ramped up debt to support its dividend and buy back stock, but for now has been easily able to cover its interest expense with operating earnings. Free cash flow production has also been solid and close to reported net income.

At the time of writing, Ryan C. Fuhrmann did not own shares in any company mentioned in this article.

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