IGT Could Hit the Jackpot — Online

by Lawrence Meyers | January 23, 2013 9:45 am

Oh, to own a piece of Internet gambling. Alas, folks running offshore poker rooms have been indicted and had their assets seized, so buying into one of those operations probably isn’t a wise move. Fortunately, the business of online gaming is increasing domestically, and investors are getting more and more ways to cash in.

This takes me to Tuesday’s International Game Technology (NYSE:IGT[1]) earnings release. The numbers were good, with first-quarter earnings up to 24 cents per share from 16 cents last year. That pushed earnings to $65.3 million from $49.3 million. It all came on a very nice jump in revenue, of about 20%, from $445 million to $530 million. North America was particularly strong, showing 54% revenue growth.

When talking about earnings, though, I like to dig a little deeper to see what’s driving it all. I’m particularly in love with IGT’s social gaming platform. The company refers to it as “Casino Entertainment meets Facebook.” IGT’s DoubleDown Casino concept is the world’s largest multi-game social gaming casino, which it acquired in 2010. It’s the No. 5 most popular app on Facebook (NASDAQ:FB[2]).

It’s a virtual casino that doesn’t actually involve gambling, but free versions of all the popular casino games: video poker, bingo, multiplayer poker, slots, blackjack and roulette. You might wonder how many people would actually play these games when they don’t involve real money, but they have 5.4 million monthly users. Revenue in this division increased 15% year-over-year, but I think it’s just getting started.

It’s only a matter of time before DoubleDown begins taking real-money wagers in non-U.S. jurisdictions. With Facebook’s global reach, it has a captive audience that’s already familiar with the product. IGT specializes in creating fun and engaging games, so its creative content married with DoubleDown’s technology will make it a brand to be reckoned with. In addition, there are signals that online gambling is moving toward state-by-state approval.

In an interview last year, DoubleDown CEO Greg Enell said, “Six months ago, we didn’t consider real money an option at all, but with IGT that becomes an option, because they’re licensed and regulated in all the states in the U.S. And because we have the strength of the relationship on Facebook, we can marry all of that together and, for example, offer real-money online slots in California on Facebook.”

Let’s look at IGT by the numbers. The stock trades at around $15, and on fiscal 2013 earnings of $1.22, it looks to be trading at around 12x earnings. However, the company bought back some 10% of its shares last year.

Long-term estimates have IGT growing at 13.9%, so it’s arguably undervalued on that basis. The company has about $700 million in cash and long-term investments against $1.7 billion in manageable debt. It paid out a very modest $16 million in dividends and paid down $75 million in debt.

The extended economic recovery, which has proven difficult for gaming and hotel companies, is a big drag for IGT. However, I think the long term will prove out the online model. Since the company isn’t in danger of bankruptcy and has a solid customer base, I would consider this a moderately speculative buy.

The stock could fall to as low as $10 depending on the economic situation, but I think that’s a floor, whereas its online venture has unlimited upside over the long term.

As of this writing, Lawrence Meyers didn’t own any securities mentioned here.

  1. IGT: http://studio-5.financialcontent.com/investplace/quote?Symbol=IGT
  2. FB: http://studio-5.financialcontent.com/investplace/quote?Symbol=FB

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