Would You Put Your Money Down on IGT?

International Game Technology's (NYSE: IGT  ) strong fundamentals and earnings leap in its latest quarter make me feel rather bullish about the company's prospects. But are you paying a decent price if you jump in on this stock today?  

Profitability
Return on equity is a crucial metric that evaluates how effectively a company is using its capital. IGT's ROE, which stands at 21.1%, is significantly higher than that of comparables Scientific Games (Nasdaq: SGMS  ) , at -29.6%, and Multimedia Games (Nasdaq: MGAM  ) , at 11.4%.

But because ROE doesn't capture the complete financial picture, a better metric to follow here is return on invested capital, which takes into account a company's debt financing as well. On this basis, IGT, with an ROIC of 10.3%, looks better still than Scientific, at 3.2%, and Multimedia, at -1%. Right off the bat, I like what I see here.

Valuation
IGT's P/E ratio of 18.1 makes it look cheaper than Bally Technologies (NYSE: BYI  ) , at 20.2. But, at 10.3, Multimedia definitely scores better. My sense here, however, is that IGT is the better-quality company and has greater earnings potential going forward. Consider that IGT's forward P/E of 18.2 is lower than Scientific's 41.8 and Multimedia's 35.5. Clearly, the market is expecting a stronger year from this company.

Stability
Don't overlook the balance sheet when evaluating the health of a company's capital structure. With a debt-to-equity ratio of 111.9%, IGT doesn't look nearly as stable as its peers Bally, whose ratio stands at 29.9%, and Multimedia, at 39.6%.

The debt-to-capital ratio, another measure of financial leverage, gives a better picture of how the company is managing its debts. IGT, with a D/C ratio of 52.8%, is levered up well beyond its rivals and this makes me a bit nervous. Bally's ratio stands at 23%, while Multimedia is at 28.4%. Among these peers, Scientific is the only one that has a higher ratio than IGT.

Yields
Also note that IGT offers a reasonably attractive current yield of 1.50% and a stable payout ratio of 28%. That's not much, but considering that none of its peers we've discussed here pay anything, investors surely won't mind the extra income.

Considering its valuation and high debt levels, I wouldn't be surprised to see investors remaining cautious on IGT for now.

Fool contributor Zeeshan Siddique owns none of the stocks mentioned in the article. The Motley Fool owns shares of International Game Technology and has opened a short position in Bally Technologies. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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