by Lawrence Meyers | December 6, 2012 6:30 am
For every industry, there is an infrastructure play. Some are better than others.
In the gaming industry, you’ve got the brick-and-mortar Megatrons named Wynn Resorts (NASDAQ:WYNN), Las Vegas Sands (NYSE:LVS), MGM Resorts (NYSE:MGM), and Caesers Entertainment (NASDAQ:CZR). Each is having its own set of challenges with the domestic economy still weak, and Macau gaming stocks getting hammered as corrupt junket operators are being arrested, potentially reducing the number of high-rollers at the casinos there.
The sector’s long-running infrastructure play? International Game Technology (NYSE:IGT).
It’s important to understand that IGT doesn’t just manufacture slot machines. It’s an infrastructure play in the truest sense of the word. Its slot machines are linked across multiple casinos for progressive jackpots, and has a centralized determination system that’s all hooked up to a centralized server. It handles video lottery as well as bingo machines for both casinos and government-sponsored contests.
IGT is relied upon by its clients to provide all the management aspects necessary to interface with both casino and customer and player. It does machine accounting, and even accounting for cages and tables, handles all those ticket machines you see in the casinos, keeps tracks of bonuses and promotions, the table games that are automated in some way, and most significantly — reporting and compliance, which is a big deal in Nevada.
Casinos also rely on what I call the “dirty little secret” of casinos (which I adore, by the way): the analytical and predictive tools. Where else but in a casino could you predict and analyze potential wins and losses so the house always comes out ahead?
IGT’s heyday was in the early part of the century. Gaming was booming, the housing crisis hadn’t yet hit, and Las Vegas was reinventing itself. Then competition started making business harder, and the bottom fell out of the economy. As great as infrastructure plays can be, they aren’t insulated from recession.
The good news about IGT, however, is that it doesn’t have the overhead that a resort has in the bad times. In the meantime, it can continue to innovate new products and be ready to sell them when the next up-cycle begins.
Indeed, with talk of online gambling being made legal, IGT could well emerge as a top player in that area.
IGT’s revenues are generated by product sales, services, interactive games and gaming operations. Last month’s results showed improvement, primarily because product sales jumped 22% (if a casino owns an IGT product, it also means IGT gets to replace those products and then charge the casino, too), and interactive revenue is going through the roof — up to $90 million from $32 million last year. Net income was up 40%.
Because of competition from Bally Technologies (NYSE:BYI) and WMS Industries (NYSE:WMS), IGT will have to continue spending money on new products. Those costs are going to be offset by the strong growth in interactive, at the very least. The company has $288 million in cash, and paid its debt down to $1.85 billion from $1.97 billion.
Also, I’ll note that two directors apparently feel that the time is right to buy in. One purchased 12,000 shares at $13.94, and another purchased 37,750 shares at $13.25 per share.
Analysts expect 17% earnings growth this year, 6% next year and 11% going forward. An 11x valuation on $1.21 per share in FY13 earnings gives fair value of $13.30, and the stock is at $14.27.
I think IGT’s future looks bright, particularly given the enormous growth in interactive gaming, and the chance for online poker to make a resurgence in the U.S. It’s worth considering.
As of this writing, Lawrence Meyers did not hold a position in any of the aforementioned securities. He is president of PDL Capital, Inc., which brokers secure high-yield investments to the general public and private equity. You can read his stock market commentary at SeekingAlpha.com. He also has written two books and blogs about public policy, journalistic integrity, popular culture and world affairs.
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