Put IGT on Your Screen

 | Feb 11, 2014 | 12:30 PM EST
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International Game Technology (IGT), also known throughout the gaming industry as IGT, has a storied history on both the Las Vegas Strip and Wall Street. With the rise of legalized gambling over the past 30 years, IGT led the gaming systems industry in terms of market share, revenue growth and profitability. The company has also been a darling on Wall Street throughout the years.

The firm currently has a 40%-plus market share in Las Vegas-style slot machines in the U.S. The company has led the slot machine industry with strong gaming brands such as Jeopardy, Wheel of Fortune and Monopoly. Moreover, IGT has been very innovative at adopting technology to automate the back-office collections and accounting functions for casinos. These brands and innovations have resulted in hyper-growth for IGT.

In addition to strong gaming growth, IGT dominated the industry over the past decade with the shift to the Mega-Slots gaming systems -- games that aggregate wagers and pay out million-dollar prizes. From 2001 until 2008, IGT experienced rapid growth from the Mega-Slots gaming systems.  

With the onslaught of the global financial crisis in 2008 and 2009, casino gambling in the U.S. underwent a steep drop in player activity. IGT saw its revenue decline from a high of $2.5 billion in 2008 to a low of $1.95 billion by 2011. Earnings also dramatically declined from a high of over $500 million in 2007 to $300 million in 2012.

Management has been doing everything in its power to turn around and revitalize the franchise. Through aggressive cost-reduction programs, operating margins have rebounded to a record high level of 41% in the most recent year. Management has also stepped up cash returns by boosting the dividend to the recent 3% level. The company has continued to engage in aggressive share-repurchase programs. Investors should see a 5% to 6% cash return as a result of these policies.

To boost the stock further, management has also stepped up international expansion plans and is moving into more online and interactive gaming. The biggest traction has been with the acquisition of Double Down Gaming for social gaming (Facebook (FB)) and tablets/smartphones (Apple (AAPL)). Revenue in this business should be close to $300 million in the upcoming year, although profitability has lagged the company averages. IGT has also moved into the nascent real-money gaming markets with the legalization of online gaming in New Jersey and the United Kingdom.

None of the online and interactive gaming initiatives are generating much in terms of profits, but this could be the next growth leg and stock catalyst at the company. We haven't yet stepped up to buy the shares, because the core gaming operations are not growing. There are even risks to the highly profitable Mega-Slots segment contracting further. However, the shares are close to trough levels of valuation, and there is good upside potential from the current depressed valuation level at 12x 2014's EPS estimate of $1.20.

The shares are cheap, and the company has a long history of industry dominance, profitability and success. IGT may be a good choice for investors who are looking for a business franchise with a lot of potential future growth.  

At a minimum, it's worth putting on your radar screen.  We will keep you posted if and when we think it makes sense to start buying.

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