Here's the deal. As we discussed last month, International Game Technology (NYSE:IGT) shares are well off last year's highs of above $47. Currently, the stock is trading at around $26. That's about a 6% jump following the slot king's second-quarter earnings report.
But the stock rebounded not because of blowout earnings. It bounced, in my opinion, because IGT's shares are cheap for a company of its stature. The stock is priced at 20 times fiscal 2005 earnings, and it gets cheaper the further you look out.
The quarterly numbers, on the other hand, weren't particularly impressive.
IGT saw net income in the second quarter fall 24% to $93.9 million, or $0.26 per share, year over year. That figure was short of the analysts' $0.31 estimate, though the company did take $0.04 per share in charges, the bulk of it on some "technically obsolete" machines under its gaming operations.
Overall revenues were down 13% to $551 million compared with the same period last year. While gaming operations alone grew 9% to $299 million, product sales dropped 30% to $252 million, and units shipped were cut in half from 45,400 units in last year's second quarter to 22,600 units now. As a result of the loss of scale, gross margins on slot sales fell from 55% to 53%.
The key here is timing. Slot sales had previously accelerated because of the rapid industrywide replacement of old slots with new coinless ticket-in/ticket-out (TITO)-capable machines. But with a slowdown in replacement sales and the wait for anticipated sales to materialize in new gaming markets in Pennsylvania, the UK, and tribal-owned casinos in California, product sales have hit a lull.
Many onlookers will also point out that IGT has lost market share on new sales to Australia's Aristocrat and smaller American rival WMS Industries (NYSE:WMS), competitors that have come on strong with their video slot offerings. As it is, switching costs for slot players is low, and the casino will go with whatever is popular with the gamblers.
That said, the bottom line is that IGT is responsible for more two-thirds of all slot machines in play. The lull is temporary, and the sales of new slots will come in the UK, Macau, Pennsylvania, Florida, and California, and as new states follow suit. And on a competitive front, IGT has both the scale and a massive R&D budget to take back shares. Meanwhile, the company has seen improved pricing, with the average revenue per unit sold climbing 37% in North America and 52% on the international front, compared with the prior-year quarter.
So no, the numbers presented here aren't pretty. But as a forward-looking investor, I believe that IGT's stock presents an opportunity to own what I consider a tip-top player in a growth industry at an attractive price.
Fool contributor Jeff Hwang owns shares of International Game Technology. The Motley Fool has a disclosure policy.
