Today's Buy Opportunity: International Game Technology

Welcome to "11 O'Clock Stock." Here at Fool.com, we've been finding a new great stock at 11 a.m. ET every weekday for the past 48 days and putting our own money behind them! However, there is only one day left, so make sure to come back to Fool.com on Monday to see the final stock pick from Motley Fool co-founder David Gardner!

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 (NYSE: IGT  ) -- and why I think investors should consider following suit.

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 (NYSE: LVS  )

$3,789

$2,093

(45%)

MGM Resorts International (NYSE: MGM  )

$782

$137

(82%)

Wynn Resorts (Nasdaq: WYNN  )

$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.

Previous recommendations (click here for full list of recommendations and performance):

Come back to Fool.com on Monday for our last stock pick! There's plenty more great stock advice, and you can find video of each day's recommendation as well!

"11 O'Clock Stock" is sponsored by Motley Fool Stock Advisor. The Motley Fool will wait at least 24 hours after this publication before purchasing shares of International Game Technology. To see an FAQ on "11 O'Clock Stock," click here.

Rich Greifner does not own shares of any company mentioned in this article. Try any of our Foolish newsletter services free for 30 days. True to its name, The Motley Fool is made up of a motley assortment of writers and analysts, each with a unique perspective; sometimes we agree, sometimes we disagree, but we all believe in the power of learning from each other through our Foolish community. The Motley Fool has a disclosure policy.


Read/Post Comments (9) | Recommend This Article (23)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On October 01, 2010, at 11:45 AM, kinosternon wrote:

    Let me get this straight: TMF suggested going short on BYI because of the downturn in gambling, but now they suggest going long IGT because of up-tick in gambling that is going to occur and the need for newer slots. I shorted BYI in CAPS and, yes, it is underperforming the market, but had I shorted it in real life I'd be losing money now. People will always gamble. Going long IGT makes sense to me so I'll add it to CAPS. But as soon as I score 5 points with that BYI red-thumb I'll close it. I think I'll have to wait 'til the market goes up over 15% for that to happen. Perhaps I'm missing something, maybe the IGT green-thumb is a TMF hedge for the BYI red-thumb. Any thoughts?

  • Report this Comment On October 01, 2010, at 12:01 PM, GreatOdinsRaven wrote:

    Diverse opinions from TMF is what makes it great. I suggest not buying/selling because of a single article but rather research for yourself to see if it's the right investment FOR YOU. Different strategies, divergent write-ups...hopefully it strengthens our understanding to become better investors.

  • Report this Comment On October 01, 2010, at 12:41 PM, TMFRhino wrote:

    Hi kinosternon,

    The BYI short was in large part due to accounting practices that could affect the coming quarters.

    I don't necessarily think there's an inconsistency here that Matt argued gambling is still very shaky for the foreseeable future (when his thesis is in large part derived from accounting practices that could play out over the coming quarters) and Rich saying operator spending will rise at some point, but he's not sure if there's an immediate catalyst.

    So what you have here is partially the basis of a shorter time frame (BYI) and a longer-term thesis (IGT) that could take time to play out.

    Best,

    Eric Bleeker (TMFRhino)

  • Report this Comment On October 01, 2010, at 1:11 PM, kinosternon wrote:

    Thanks for the input guys. I'm always learning.

  • Report this Comment On October 01, 2010, at 8:53 PM, scanlin wrote:

    The only way I would play IGT is with a buy-write to give me some downside protection. Next earnings Nov 4, so the Oct cycle is safe. Maybe buy IGT and sell the Oct 14 for net debit of 13.86. Will make > 24% annualized return if flat, and you have 3.5% of downside protection (for 2 weeks).

    MikeS

    http://www.borntosell.com

  • Report this Comment On October 02, 2010, at 6:18 AM, tubavestor wrote:

    50% market share? "Several years ago" they had market share north of 70%, down to they claimed was a sustainable 60% in 2008:

    http://ggbmagazine.com/issue/vol__7_no__2_february_2008/arti...

    I'm willing to believe that part of their share price is from cyclical forces, but a steady decrease in market share makes it difficult for me to believe that this it the right horse to back when things speed up, unless you're selling them as a turnaround story vs. a market leader who will naturally rise again when the market recovers.

  • Report this Comment On October 02, 2010, at 3:04 PM, TMFTenacious wrote:

    @tubavestor: You're definitely correct that IGT's market share has declined over the past few years. Part of this was a result of previous management taking its eye off the ball; part was simply competitors gaining ground.

    Add I mentioned in the accompanying video (see the main fool.com site), I have been pleasantly surprised by the progress new CEO Patti Hart has made since taking the helm about 1.5 years ago. IGT has renewed its focus on its content, and I expect the company to regain some of that lost market share.

    A small part of the investment thesis is an operational turnaround, but I think the greater reason to invest is the inevitable and significant replacement cycle.

    Thanks for reading,

    Rich

  • Report this Comment On October 08, 2010, at 12:43 PM, buckeye107 wrote:

    The problem with IGT is that their slot machines are not much fun. Aristocrat slots have only been available in the USA for 10 years and they are taking over the slot market here. Go to any casino and watch people line up to play Buffalo, 100 Lions, etc.

  • Report this Comment On October 08, 2010, at 3:45 PM, Carioca58 wrote:

    Regarding the "Catalyst #2" in the analysis, I remind that casinos have been illegal in Brazil since 1946. Many efforts to overturn this law have fizzled, and there is no indication that there is a concerted effort to succeed now. Therefore, I don't think that Brazil is a growth opportunity for IGT right now.

Add your comment.

DocumentId: 1319031, ~/Articles/ArticleHandler.aspx, 4/21/2014 6:37:17 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement