IGT: A Winning Streak at the Slots
Casinos battling for customers rely on the slot-machine maker's new wares, and demand is rising as more gambling areas spring up
It has been a losing year so far for casino stocks. Fears of war and some disappointing fourth-quarter results knocked 11% off the UBS Warburg gaming index. That's far worse than the 4% decline in the benchmark Standard & Poor's 500-stock index. One gambling stock has continued to shine, however. International Game Technology (IGT
) is up about 2% so far in 2003. In the past three years, while the overall stock market has practically collapsed, IGT shares have more than tripled. "IGT is one of the few companies that's actually recession-proof," says Todd Griesbach, an analyst at Liberty Wanger Asset Management in Chicago. The outfit jumped to the 18th spot in the annual BusinessWeek 50 list of best-performing companies in 2003, from its 2002 position of 46th.
What makes IGT, based in Reno, Nev., such a winner? Simple -- when outfits like Park Place Entertainment (PPE
) and MGM Mirage (MGG
) fight it out for customers on the Las Vegas Strip, their weapon of choice is quite frequently a brand-new slot machine. IGT, which spends some $80 million a year on research and development, is sort of the Intel of slots, cranking out new generations of products that its casino customers must upgrade to.
"MEGABUCK" EARNINGS. IGT was among the first slot-machine makers to replace mechanical wheels with computer chips in the 1980s. It also pioneered the idea of creating networks of slots at different casinos that entice gamblers with "Megabuck" payouts. The next such winner in Nevada, for example, will land him or herself in the Guinness Book of World Records with a better than $35 million payout. Half of IGT's sales and a slightly larger share of earnings now come from those networks, which IGT manages on behalf of the casinos.
This year's big attraction will be coinless slots. These are machines that tally winnings on a paper ticket, saving the casinos the time and money it takes to count all those coins. IGT reports that its orders for replacement machines have more than doubled -- to 42,000 -- in the past two years, as casinos take out older devices in favor of the new coinless variety.
Another big trend in IGT's favor: New gambling jurisdictions. The outfit is presently taking orders for a big new Native American casino in upstate New York. A bill legalizing slots at Pennsylvania's racetracks was introduced in the state senate in early March. Two gaming proposals -- one calling for slots at Maine's two harness-racing tracks and another approving a $650 million tribal casino -- have qualified for the November statewide ballot. And Maryland's new governor is aiming to have casinos in the state.
GOOD ODDS. IGT's sales and net income have grown at a compound annual rate of 22% and 24%, respectively, over the last five years. Its results for the quarter ended last December handily beat Wall Street estimates, with earnings per share from continuing operations jumping 43%, to $1, while revenues increased 58%, to $531.5 million.
All of this growth hasn't gone unnoticed. At a recent price of $76 per share, IGT trades at nearly 23 times trailing 12-month earnings and nearly 20 times the $3.86 per share it's expected to earn for its fiscal year ending in September. Yet, by all accounts, the odds of this stock continuing to outperform the market and its peers remain better than average. For investors, it hasn't paid to bet against IGT.
MARCH 24, 2003
Palmeri writes for BusinessWeek from Los Angeles Edited By Beth Belton
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