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Eric Cota
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I'm a value investor for the long term primarily focused on firms in the S&P 500 that produce solid free cash flow and pay dividends. I look for undervalued firms using a discounted cash flow model. I reinvest dividends and track performance on a total return, risk-adjusted basis. Five years... More
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  • International Game Technology: Cash Flow Valuation 0 comments
    Feb 21, 2012 7:30 PM | about stocks: IGT

    Current Price: ~ $15/share
    Projected Yield: ~ 1.63%

    IGT manufactures gaming machines for customers in jurisdictions where gambling is legal. The firm is one of the three major gaming machine suppliers along with WMS Industries and Bally. IGT has produced many of the most recognizable slot machines in the industry with titles such as Wheel of Fortune, American Idol, and Wolf Run. The firm also provides casino back-office hardware and software systems that manage a customer's entire casino floor. The firm is headquartered in Las Vegas, Nev.

    Estimated WACC for the firm today is 12.36% using the Capital Asset Pricing Model and the company's recent SEC filings.

    Recent free cash flows and noted growth rates:

    Year FCF $Millions
    2002 471
    2003 310
    2004 413
    2005 488
    2006 314
    2007 477
    2008 188
    2009 291
    2010 351
    2011 407
    TTM 363

    Average Annual Growth FCF: ~ 7%

    CAGR FCF: ~ -2%
    Consensus Forecast Industry 5-Year Growth: ~ 13% per year

    Consensus Forecast Company 5-Year Growth: ~ 13% per year

    Internal Growth Rate: ~ 5%

    Sustainable Growth Rate: ~ 19%

    Scenario 1

    • Start at $407 million FCF
    • Assume a 5-year growth rate in FCF of 13% per year, then no growth or 0% growth in FCF per year forever:

    Discounted Cash Flow Valuation

    Year FCF $Millions
    0 407
    1 460
    2 520
    3 587
    4 664
    5 750
    Terminal Value 6858

    The firm's future cash flows, discounted at a WACC of 12.36%, give a present value for the entire firm (Debt + Equity) of $5901 million. If the firm's fair value of debt is estimated at $1918 million, then the fair value of the firm's equity could be $3983 million. $3983 million / 298 million outstanding shares is approximately $13 per share and a 20% margin of safety is $10/share.

    Scenario 2
    All else being equal,

    • Assume a 5-year growth rate in FCF of 13% per year, then 3.50% growth in FCF per year forever:

    Discounted Cash Flow Valuation

    Year FCF $Millions
    0 407
    1 460
    2 520
    3 587
    4 664
    5 750
    Terminal Value 9569
    • Present Value of the entire firm (Debt + Equity): $7415 million
    • Value of Equity: $5497 million or $18/share
    • 20% margin of safety is $14/share

    Sources

    Morningstar.com

    Yahoo! Finance

    IGT.com

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

    Stocks: IGT
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