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International Game Technology: Cash Flow Valuation

|Includes:International Game Technology (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
Click to enlarge

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
Click to enlarge

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
Click to enlarge
  • 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