IGT: Time to Buy?

Slot king International Game Technology (NYSE:IGT) has capped off a fiscal year that was slow domestically but featured rapid international growth. While overall product sales slipped 4.1% to $300 million in the fourth quarter, international product sales jumped 80% to $139.7 million, driven primarily by the sale of 18,500 units to Japan. On a unit basis, international sales increased 141% to 29,700 units from 12,300 in last year's fourth quarter.

IGT also continued the expansion of its gaming operations. Its installed base of recurring revenue machines increased by 300 units during the quarter to 38,800 -- despite the removal of 742 games from the Gulf Coast region related to the damage done by hurricanes Katrina and Rita. However, revenues from gaming operations decreased slightly to $307.6 million because of hurricane-related business disruption.

Overall, IGT saw total revenues drop 2.7% in the fourth quarter to $607.6 million. Meanwhile, the company posted earnings from continuing operations of $105.4 million or $0.30 per share, figures that match the analyst estimates. The company said that Katrina and Rita and the closure of Gulf Coast-area casinos -- including those owned by Harrah's Entertainment (NYSE:HET), MGM Mirage (NYSE:MGM), and Penn National (NASDAQ:PENN) -- had a $14.9 million impact on results and reduced earnings by 2.6 cents per share in the quarter.

For the year, IGT posted income from continuing operations of $436.5 million, or $1.20 per share, up from $1.17 per share in fiscal 2004.

And investors can expect more of the same in fiscal 2006. In its earnings conference call (transcript provided by StreetEvents), management maintained its forecast for earnings of $1.20 per share, excluding the expensing of the stock options.

Poised for growth
Now here's the bottom line: IGT holds a dominating market share -- more than 70% domestically -- among slot machine manufacturers. To help maintain that share, IGT spends twice as much on research and development than does the next largest of its competitors -- a list that includes WMS Industries, Alliance Gaming (NYSE:AGI), GTECH's Atronic, and Australia's Aristocrat. At the same time, IGT's increasing installed base of recurring revenue machines provides a growing, reliable, and geographically diverse stream of income. The company expects international business, which reached $100 million in operating income in fiscal 2005, to double that amount in three years, as business continues to grow rapidly in locales such as Japan, Australia, Mexico, and Macau. And while domestic slot sales aren't expected to pick up in 2006, new gaming markets and the next generation of slot technology will provide the next wave of growth beginning in 2007.

That last point -- domestic slot sales -- is the primary reason the stock has been beaten down: Despite rising 7% Thursday to close at $27.85, the stock is still well off its 52-week highs of around $36 and its two-year highs in the mid-$40s.

IGT shipped only 50,500 units domestically in fiscal 2005, after sending out a whopping 92,500 units the previous year and 83,900 units in fiscal 2003 as casino operators rapidly migrated to coinless slot machines. And with the rollout of those so-called "ticket-in/ticket-out" (TITO) machines now 80% complete, the company doesn't expect to ship much more than 50,000 units again in fiscal 2006.

But in fiscal 2007, the company expects to get a boost from the opening of a pair of "racinos" (racetrack-casino combinations) in New York, as well as the introduction of slots at seven 3,000-slot racetracks in Pennsylvania, with another five slot parlors housing 3,000 slots each in Pennsylvania to follow some time after that (see "The Magnitude of Pennsylvania's Slots"). And in fiscal 2008, the company expects server-based gaming -- which allows for such advancements as remote game downloading -- to spur the next slot replacement cycle.

Among other things, IGT has moved into online gaming with the acquisition of WagerWorks, and the company has also partnered with Motley Fool Stock Advisor selection Shuffle Master (NASDAQ:SHFL) and Progressive Gaming International (NASDAQ:PGIC) to produce the Intelligent Table System -- a new table games system involving radio frequency identification (RFID) that will improve player tracking.

Company snapshot
Here's an overview of how things have looked at IGT over the past three fiscal years.

Look past fiscal 2006
The stock trades at a moderate 23 times fiscal 2006 earnings. And with a $9.5 billion market cap, IGT trades at 19.5 times the $487.8 million in free cash flow the company produced over fiscal 2005. Meanwhile, the company has continually returned that free cash to investors: In fiscal 2005, IGT paid $166 million in dividends and spent $355 million buying back 12.8 million shares at an average of $27.78 per share.

As an investor, you can't really ask for much more. IGT is the dominant player in its game and is a cash generating, dividend-paying company that buys back its shares on the cheap. If you can look past fiscal 2006, I think now may be the time to buy a dominant company that is positioned and poised for growth.

For related gaming commentary by Jeff Hwang, check out:

• Gaming Roundup: Harrah's and Starwood Go Tropical
• Ameristar: Time to Buy?
• The Magnitude of Pennsylvania's Slots
• Those Pennies Add Up

GTECH is a Motley Fool Inside Value recommendation.

Fool contributor Jeff Hwang owns shares of International Game Technology. The Motley Fool has a disclosure policy.