International Game Technology: Winning Pick in the Casino Gaming Equipment Industry

 |  Includes: BYI, IGT, WMS-OLD
by: GuruFundPicks

Reno-based Intl Game Technology (NYSE:IGT), a global leader in the design, development and manufacture of gaming machines and system products, as well as online and mobile gaming solutions for regulated markets, announced its March 2011 quarterly report after the market close on Thursday (Click here for Earnings Call Transcript). Earnings at 23 cents came in 3 cents above the street consensus estimate of 20 cents and revenue at $492.3 million also beat the consensus estimate of $479.2 million. This is the strongest beat since the June 2009 quarterly report almost two years ago, and represents year-over-year growth in both revenue and earnings versus flat to falling revenue and earnings year-over-year for the prior three quarters. For the fiscal year ending September 2011, the company projects earnings in-line at between 84c and 90c versus 87c analyst estimate.

IGT is the world’s leading slot machine manufacturer, producing two out of every three slot machines found in North America today. It also leads the pack in server based gaming technology, where instead of being stand-alone, slot machines are networked with a central processing system. This enables gaming machine operators to make dynamic adjustments remotely such as changing denominations, awards and game themes on the fly instead of a technician having to shut down the system, and then manually make those adjustments. Also, the server based gaming technology enables the delivery of games not only to slot machines, but also computers, mobile phones, tablets and other networked devices, providing casino operators with additional revenue-generation opportunities.

IGT generates revenue through two business segments, Gaming Operations and Product Sales. The Gaming Operations segment accounts for 56% of the overall revenue and includes recurring revenue generated from machines the company has leased to casinos in exchange for a share of the proceeds, and the Product Sales segment accounts for the remaining 44% and includes revenue generated from equipment, components and associated service sales. Product sales were strong in the current quarter, increasing to $214.7 million a year-over-year increase compared to the $206.7 million generated in the March 2010 quarter, while service sales were generally flat year-over-year.

In the current quarter, the company reduced its dependence on replacement units, shipping 1,500 and 2,300 million ‘new’ units in the North America and International markets respectively, a significant year-over-year increase compared to the 700 million and 1,300 million units shipped in the March 2010 quarter. In contrast, replacement units shipped fell year-over-year to 3,800 million and 2,400 million units in the North America and International markets respectively versus the 4,200 million and 3,300 million units shipped in the March 2010 quarter. Also, the company reduced cost of sales in the March 2011 quarter for both its Gaming Operations and Product Sales units, but particularly in the product sales unit where costs dropped 12% while revenues rose 4%.

The industry has high barriers to entry due to the stringent regulatory environment, and as such IGT has only two main competitors, WMS Industries Inc. (NYSE:WMS-OLD) and Bally Technologies Inc. (NYSE:BYI). WMS develops video and mechanical reel-spinning gaming machines and video lottery terminals, and BYI develops advanced technology-based gaming devices, systems and server-based solutions. Their relative price-to-sales and P/E ratios are illustrated in the Table below.




Current Price




Projected 2011 Annual Rev ($m)




Market Capitalization ($m)




Price-to-Sales (PSR) Ratio




Current TTM Earnings




Current PE




Projected 2011 Revenue Growth Rate




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Although WMS appears to be the cheapest based on P/E, it is not the most attractive as just about two weeks ago on April 11, it guided sharply lower for the March 2011 quarter, lowering revenue to $191-193 million versus the $212 million analyst consensus and earnings to 40c to 42c versus the 51c estimate. WMS cited among other factors a lower-than-anticipated new unit demand, which caused analyst to lower their targets and subsequently led to a sell-off in all three stocks.

In contrast, IGT strongly beat both revenue and earnings for the current quarter and projected in-line for the FY ending September 2011. Also, the company stated in its conference call on Thursday that, “We expect our current trends of moderate revenue and earnings growth to continue for the remainder of this year and into fiscal year 2012.” Also, IGT has a dividend yield of 1.5%, whereas its peers WMS and BYI do not pay any dividends, making IGT the most under-valued when adjusted for dividends. Further, there is more pessimism in the market about WMS and BYI versus IGT as reflected in the amount of shares in float that are shorted; only 5% of the IGT float is short, whereas 11% and 14% of WMS and BYI float are shorted respectively.

Thus, IGT represents the best pick in the Casino Gaming Equipment industry based on its recent quarter outperformance, market leading share, innovative server based gaming technology, recent cost-cutting initiatives, consistent cash flow generation, good dividend yield and higher sales of new units in the current quarter. IGT stock should gain strength based on this quarterly report, and should attempt at least to regain the $19 high it set recently in January. WMS in contrast can recover to prior resistance near $35 based on the strength of IGT’s current quarter, but it is unlikely that it will penetrate that level. Both WMS and BYI are expected to report this week, WMS on Tuesday April 26th after the market closes and BYI on Thursday April 28th after the market closes.

Credit: Historical fundamentals including operating metrics and stock ownership information were derived using I-Metrix® by Edgar Online® and Zacks Investment Research. The information and data is believed to be accurate, but no guarantees or representations are made.

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Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.