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It's sad but true: Over the past three years, you would have been better off plunking your hard-earned money into a slot machine than buying shares of a slot machine manufacturer. However, I think that's all about to change, thanks to three significant and inevitable catalysts on the horizon. Read on to see why The Motley Fool is investing in slot gaming juggernaut International Game Technology
IGT's fast facts
|
Market Cap |
$4.1 billion |
|
Revenue (TTM) |
$2.0 billion |
|
Earnings (TTM) |
$160 million |
|
Cash/Debt |
$165 million / $1.8 billion |
Source: Capital IQ, a division of Standard & Poor's. TTM = trailing 12 months.
Founded in 1980, IGT is the leading slot machine maker in the world, with roughly 50% of the U.S. market share. With a presence in practically every casino across the globe, the company is broadly diversified in terms of both geography and customer base. IGT enjoys a steady stream of recurring revenue and generates consistent free cash flow. In addition, the company boasts a strong brand portfolio -- it owns the perennially popular Wheel of Fortune, Megabucks, and Sex and the City games -- and a history of innovation. So what's not to like?
Besides the recession, of course
Despite its competitive advantages, IGT has been severely affected by the worldwide economic downturn. Faced with debt-laden balance sheets and declining attendance, IGT's casino customers have postponed purchasing new slot machines and delayed replacing their existing fleet. Just check out the trend in capital expenditures at these three large casino companies:
|
Capital Expenditures (millions) |
2008 |
2009 |
Change |
|---|---|---|---|
|
Las Vegas Sands |
$3,789 |
$2,093 |
(45%) |
|
MGM Resorts International |
$782 |
$137 |
(82%) |
|
Wynn Resorts |
$1,333 |
$541 |
(59%) |
Source: Capital IQ, a division of Standard & Poor's.
Not surprisingly, this slowdown in casino spending has had a direct effect on IGT's income statement. Revenue fell 16% in fiscal 2009, while pre-tax profit plunged 42% -- and that doesn't even include the $103 million IGT realized in restructuring charges and asset writedowns. As you might expect, investors quickly soured on IGT's formerly high-flying stock, and shares are currently down 70% from their 2008 peak.
So why buy?
While the near term will likely continue to be challenging for IGT, I believe the company is bound to benefit from three significant and inevitable catalysts:
Catalyst No. 1: Keeping up with the Joneses
Casinos may be able to defer replacing their aging slot machines, but they can't postpone these upgrades indefinitely. As newer slot games become more dynamic, casinos will be forced to replace their older machines or risk losing traffic. This pent-up demand will fuel a lengthy replacement cycle -- as soon as the first major player makes a move.
Catalyst No. 2: Manifest destiny
IGT's international operations already contribute 23% of revenue, and I expect that number to increase over time as slot gaming becomes more prevalent, particularly in Southeast Asia. IGT has already made inroads in Italy, with Greece and Brazil both possibilities in the future.
And of course, there's also room for expansion here at home. While the recession has certainly hurt sales in the short term, it may actually prove to be a long-term blessing, as cash-strapped state and local governments seek out new revenue sources. Many states, including Maryland, Ohio, and Illinois, have recently relaxed their restrictions on slot gaming, and others such as Massachusetts and New Hampshire appear ready to join them.
Catalyst No. 3: You got served
When casinos finally open their wallets and splurge for new slot machines, there's a good chance they'll upgrade to IGT's server-based gaming platform. You can think of server-based gaming as cloud computing for the casino floor. IGT's server-based machines are blank terminals connected to a central computer system, which gives the casino manager the ability to change each machine's game, denomination, and bonus payouts in a matter of minutes. This ability to customize content to suit players' changing preferences could prove a key differentiator for early adopters such as MGM's Aria casino -- and a big driver for IGT's bottom line.
Foolish final thoughts
IGT is an industry leader with a strong business model, sustainable competitive advantages, and a bright future. There's no telling when the company's numerous growth catalysts will kick in, but when they do, I believe shareholders will hit the jackpot.
Interested in reading more about IGT? Add it to My Watchlist, which will find all of our Foolish analysis on this stock.
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