I have to tell you that International Gaming Technology (NYSE:IGT) is one of my favorite stocks right now. For those that don't know, IGT is the largest retailer of gaming systems in the United States. They are mostly known for slot machines - and a lot of them. In an industry in which intellectual property and exclusive contracts are crucial, IGT is dominant. Wheel of Fortune, Megabucks, Double Diamond – all IGT machines.
There are a couple reasons I love this stock. First off, it recently hit its 52 week low in mid-August at 34.20. It was a relatively cheap buy back then. It has gone up to around 42.79, as I write this. You're probably thinking you missed the boat, but believe me you didn't.
IGT has so much growth potential that even though the stock has gone up, most likely it's going to continue to rise. A lot of people are excited about Macau as IGT's future market potential. With so many casinos opening in Asia, it would make sense they would need slot machines. However, unlike in the US, only about 5% of Macau revenue comes from slot action. Don't get me wrong, 5% of $6 billion is good money. But it's not the wonderland that people make it out to be. Chinese have traditionally played table games - mostly dice and tile games that Americans don't understand.
Quick aside – there is a great episode of the CBS show "How I Met Your Mother" in which the main characters go to Atlantic City. One of the characters, Barney, turns out to be a compulsive gambler who plays an obscure Chinese table game. The game involves casino chips, tiles, exchanging seats with another player, a dealer rolling dice and a spinning wheel. The game ends with Marshall saying, "Barney, split your tiles. You can triple your money if you find the jelly bean."
If you look at the history of Las Vegas, slot machines took an extremely long time before they became popular. While men played table games, their wives would often occupy their time by playing slots. It was never really meant as a revenue stream. But over time, slot machines started to consume the majority the casino floor. So chances are in Macau eventually Chinese gamblers will learn to appreciate slot machines, but it's going to take several years. Also, IGT does not have the dominant market share in developing markets. That means that there may be increased competition from other companies that IGT may not experience in the United States. The real potential for IGT is in domestic markets. In a downward economy, many states are seeing potential for gaming revenue. Racetracks are a prime target for slot machines, with the hope being it would increase race related revenue. Unfortunately, it has been proven numerous times that it doesn't. Yet legislators are willing to pretend these reports don't exist because it's a logical excuse to increase gaming revenue. Combined with full casinos legislation in new markets (like Massachusetts) there is strong growth potential for IGT.
IGT will be a leader in server based gaming technology by 2009. The ability of the company to innovate towards new product offerings will largely drive sales in the future. In the next several years, the markets will be there. It will just be a matter of how well IGT can adapt to new markets to drive growth into the future.
Disclosure: Author has a long position in IGT