International Game Technology: Worth the Gamble?

| About: International Game (IGT)

We have a Neutral rating on International Game Technology (NYSE:IGT), indicating that it would perform in line with the market. Our target price of $21.00 is based on a P/E multiple of 23.6X our 2010 EPS estimate, a discount to the peer group.

While spending appears to be rebounding, the recovery in the leisure and gaming industry appears to be slow.

IGT holds a leadership position in slot machines and is well positioned to benefit from the recovery, as more casinos seek to upgrade their games and systems. The company is a leading manufacturer, designer, producer and marketer of computerized casino gaming equipment, systems and devices worldwide.

Strategic acquisitions and various licensing agreements have enabled the company to grow its customer base, expand market share and acquire a large portfolio of intellectual property and patents.

The key goal for the company in 2010 is to manage costs. Given the economic downturn and reduced demand for game play, revenue growth has been hit hard. Hence, IGT is focusing on reducing operational costs to improve profitability.

International Game generates strong cash flows. Despite weak economic conditions, IGT generated $547.9 million in operating cash flow this year, up $61.4 million from 2008. Moreover, the company's substantial free cash flow could drive future growth. Free cash flow totaled $169.2 million in fiscal 2009 versus $12.7 million in fiscal 2008.

The company’s fourth quarter results topped the Zacks Consensus Estimate. IGT is witnessing stable demand for its slot machines and casino management systems. Ongoing cost-cutting initiatives, substantial free cash flow, increased international penetration, expansion of gaming operations into new U.S. jurisdictions and rapid replacement of new machines will drive growth.

However, International Game remains significantly challenged by the tepid economic condition, which is impacting its gaming business, resulting in falling domestic replacement and lower play levels (game revenue depends 85% on play levels), as well as mix-shift to lower yield stand-alone lease operation games in its installed base.

Moreover, the highly leveraged balance sheet and strong competition from Aristocrat Leisure Ltd., Bally Technologies (NYSE:BYI) and WMS Industries Inc. (NYSE:WMS) is a concern.