Gambling's Not-So-Great Expectations

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What do you get when you combine diminished expectations with soft financial results?

If you're an investor in International Game Technology (NYSE: IGT), you get a booming stock price, up 13% Thursday on nearly double the average daily volume. The reason: IGT's earnings per share of $0.22 for the March-June quarter beat the Wall Street consensus forecast by $0.04.

Once you stop applauding -- the stock was easing back a bit on Friday -- check the numbers for the large slot-machine developer. The consensus earnings forecast for IGT's third quarter was the lowest quarterly prediction in more than six years.

Those third-quarter results were worse than the year-ago quarter, as net income fell to $66.3 million from $108.3 million, while revenue dropped 23% to $522.1 million.

And when the CEO uses a phrase like "an environment of suppressed demand," you might ask: "What's all the cheering about?"

Making changes
Some cheering owes to IGT's stock nearly tripling since it hit an intraday low of $6.81 on March 9. If you've held the stock for a year, you're still in the red.

Others are cheering IGT's efforts to strengthen its financial foundation. In recent months, IGT has completed a popular issuance of convertible notes and amended a $1.7 billion credit facility.

And still others cheer because IGT is reducing operating expenses. Its cost-cutting campaign includes trimming payroll and improving manufacturing efficiency.

Forecasting changes
There's also encouraging news that isn't reflected in the quarter. Some state legislatures are turning to expanded gambling for more funds. Slot machines and video poker terminals are high on the list.

Ohio just gave the OK to add slot machines at racetracks, and it will let voters decide in November whether or not to allow casinos in four large cities. Illinois has a new law enabling bars and restaurants to install video poker terminals.

IGT sees an expanding market, but it must wrestle with companies like WMS Industries (NYSE: WMS) and Bally Technologies (NYSE: BYI) for a share of the action.

The recession will eventually end, and the gambling industry will rebound to an unknown degree at an uncertain pace. Gambling technology companies should be in the forefront, because their products are used not only by casinos but also by racetracks and state lotteries. As for IGT, sell-side analysts are divided between "buys" and "holds," with a few "sells" tossed in.

A disciplined gambler sets a limit on wins and losses. A disciplined investor should treat IGT the same way. If you bought IGT when it fell to single-digit lows in March or November, you've more than doubled your money. Remember the CEO's comments about "suppressed demand?" Maybe this isn't the time to double down.

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