Slot maker International Game Technology's
The primary growth driver in the quarter was the gaming operations segment, which installs slot machines at casinos and racinos (race tracks with some form of gambling) and takes revenue from slot play. That unit ended the quarter with a record installed base of 36,400 machines -- up 2,800 from last year's quarter -- helping sales grow 16% to $303.3 million.
But I know what you're thinking: It was a good quarter, and the company beat estimates, so why is the stock down 7% to $31.52?
Tough question, and one that I'm usually inclined to ignore.
What may be noteworthy is that even though product sales climbed another 5% to $315.6 million, slot sales actually slowed on a unit basis. Worldwide slot sales fell from 37,500 units last year to 35,100 this past quarter, with domestic sales falling from 24,200 to 22,500 units. Though domestic replacement sales edged up, new slot sales fell from 6,700 to 4,700 machines. However, the decline in unit sales was more than offset by a 9% overall increase in average selling prices (ASPs).
In addition, the company said it expected earnings growth of about 15% over the next five years, which may be tough for the market to swallow, since everybody is familiar with IGT's story and its stock has been priced an according premium.
But the company also forecast flat growth for the next several quarters before seeing a ramp up toward the end of fiscal 2005 as slot play in California expands and slots are introduced into Pennsylvania. That trend should also apply to competitors WMS Industries
Also noteworthy is that gross margins continued to climb. The gaming operations segment saw gross margins bump up to 55% from 52% last year, and the gross margin in slot sales jumped to 54% from 48% because of the increase in ASPs, as well as lower material costs and "increased operating efficiencies" at the company's manufacturing facility in Reno.
So despite the action with the stock this morning, the bottom line is that it was still a good quarter and that IGT's future is still intact.
The company is in good shape, and the stock has been beaten back down. And as an investor, I certainly don't find it inappropriate to pay a moderate premium for a cash-generating machine that is the dominant company in an attractive industry. IGT clearly applies here as a rational buy with a forward P/E in the low 20s.
Fool contributor Jeff Hwang owns shares of International Game Technology.