The purpose of this series is to highlight stocks that are undervalued, profitable, underperformed the market, and have a favorable technical outlook. The stock that I will be covering for my undervalued series this week is International Game Technology (IGT). IGT stock has fallen 17.17% in the last quarter compared to the S&P 500 (SPY), which has gained 5.69% in the last quarter. I believe International Game Technology is a solid undervalued long-term choice to gain exposure to the global growth of computerized gaming. With the trend of gaming moving to mobile and social, IGT is positioned to take advantage of this trend because of its popular DoubleDown Virtual Casino Facebook (FB) app. In the most recent earnings report, social gaming revenues grew 72% yoy and with more states like New Jersey legalizing online gambling, IGT stands to benefit from this trend. In addition to its social gaming segment, the largest two segments of IGT are its products sales, and gaming operations businesses. Its products division is the division that sells slot machines, video poker machines, etc. to casinos and establishments. Then its gaming operations business comes from the operation of its Megajackpots® machines and games.
To value IGT I will be using a DCF calculator, with data for earnings and growth coming from Zacks.com, benchmark data from longrundata.com, and CPI data from the BLS. The DCF table below shows shares of IGT is undervalued by 75.79%, which represents a good opportunity for price appreciation for shares of IGT.
EPS [ttm]: $1.27
Long-term Growth Rate: 14%
Earnings grow for next: 5 years
Level off: to 1% after
Benchmark return: 10 yr annualized SPY return of 7.30%+1.00% inflation= 8.30% benchmark
The chart below shows that shares of IGT have been steadily rising this year, until shares hit a high of just over $21 in the middle of September. Since then shares have been steadily declining to current levels of just over $17, which is a decline of 18.8% in the last 3 months. Shares of IGT are currently in the middle of its downward channel [Red Lines] and have been trending lower over the last three months. The price action on Monday was odd because the market was up 0.63%, while IGT was down 1.61% on no news, therefore in the short-term there could be more potential downside. In the long-term however, IGT has a strong level of support [Blue Line], this level is important because shares of IGT failed to close above this level at the end of January this year, but were able to close above it in early February. Once shares of IGT closed above this level, shares of IGT have retested this level of support multiple times, which is at around $15.67. Each time the stock has tested the support level it has held and shares have rebounded higher. Going forward if the share price continues to follow the current downward channel, the stock will trend right down to its horizontal support, which I expect, will hold as it has done in the past, and rebound off a move towards my fair value of $30.14/share.
The biggest catalyst for International Game Technology going forward is the shift to social and mobile gaming. In the most recent earnings report, the data showed that social gaming revenue grew from $87 million in 2012 to $218.5 million for 2013, which is a 151% increase. As a percentage of revenues for 2013, social gaming makes up 9.52% of revenues, which every quarter is making up a larger percentage of total revenues. As social & mobile gaming continue to grow, IGT is well positioned because of its "superior" content according to a recent investor presentation. Many times companies will say things like "best this" "best that" etc, so I looked at Topapps.net, which reviews Facebook apps and I looked at the DoubleDown casino app, and the review had statements about the app like:
- "State of the art gaming app that has dozens of casino slot and poker games."
- "This app creates the feel of sitting at a real Las Vegas casino table."
This brings me to my next catalyst for the stock, the potential for real money gambling online. Most recently, New Jersey legalized online gaming and in less than one month, according to an Associated Press article, 91,000 people have created accounts. This represents a huge opportunity for IGT because of its superior games and the experience of making players have the feeling of sitting at a real Las Vegas casino table, or Atlantic City in this case. With states looking for new sources of revenues, online gaming is an option that many states are considering. I believe going forward the combination of social gaming, and online gaming will be strong growth drivers into the future. Those two growth areas coupled with the traditional businesses of IGT, provides stable cash flow to fund R&D to make sure IGT has innovative technology, for paying dividends, and share repurchases.
The biggest risk to International Game Technology going forward is a decline in its traditional businesses. In the last quarter, the products sales segment had flat revenue compared to last year. In addition, the profit margin on those sales fell from 56% to 50%, and the sales price on machines IGT sold fell by 23% compared to last year. A similar thing is occurring in its gaming operations business, which saw a 6% decline in revenues compared to last year. There are a couple reasons I believe this is occurring, the first being the growth of mobile and social gaming, and the second being the lower consumer discretionary spending. First, while social gaming is a growth opportunity for IGT, it appears as though it is growing at the expense of its traditional businesses. Second, if consumers have less discretionary funds available because of increased expenditures, then consumers are less likely to spend those funds on gaming, which could be a potential risk for IGT.
I believe shares of IGT are poised to move higher from current levels, because the stock is undervalued, the stock is in a downward channel but has strong support below where the stocks is currently trading, and the company is well positioned to take advantage of the growth in social and online gaming in the long-term. In addition, IGT has a 2.30% dividend yield that has been growing rapidly over the last year with the company raising its dividend each of the last 4 quarters. Another positive is IGT has been buying back shares, and in the most recent quarter authorized a $200 million accelerated share repurchase program, which represents 4.73% of current shares outstanding. Based on all these factors, I believe going forward shares of International Game Technology in the long-term will move higher to my fair value estimate of $30.13.