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Competition Heats Up for International Game

At recent levels between $28 and $29, shares are about 40% below last April's high.

Expectations for lower U.S. slot sales have prompted some analysts to pare estimates for IGT. Last week, Bear Stearns' Joseph Greff reduced his fiscal 2005 EPS estimate to $1.29 from $1.36. The average Wall Street estimate is $1.33, according to Thomson First Call.

Greff also cut his fiscal 2006 EPS estimate to $1.52 from $1.62 and below the consensus of $1.63. Bear Stearns does and seeks to do business with companies covered in its research reports.

In a research note, Greff recommended opportunistic purchases of IGT shares if they fall further -- to between $26 and $27 -- but he expressed concern about WMS and Aristocrat taking market share. Recent interviews with Atlantic City, N.J., slot managers reveal that they are severely scaling back machine orders and shifting market share to WMS and Aristocrat, according to Greff.

Meanwhile, positive developments at IGT may already be accounted for. "While the installed base backlog looks encouraging, as does newer slot product (Fort Knox, Star Wars, Video Megabucks), which should generate gradual gains, we think this is baked into our new estimates and doesn't really serve as upside EPS," wrote Greff, who rates IGT at peer perform.

Last month, after Aristocrat reported second-half 2004 results, Merrill Lynch analyst David Anders estimated that IGT's market share of casino devices sold slipped to 56%. He attributed the shift to the strength of Aristocrat's penny-denominated slots, but he noted that IGT was losing market share in participation games, in which multiple slot machines are linked and players pay into a group jackpot. Anders estimated that IGT's share of the participation games market fell to 64%.

"Importantly, Aristocrat mentioned that it is not seeing a significant competitive response from other gaming equipment suppliers," Anders wrote in a research note. "Furthermore, we expect Aristocrat to remain aggressive on the North American participation game business. ... We believe that these results highlight that the competitive environment has meaningfully increased and maintaining share will be challenging going forward." Merrill Lynch does and seeks to do business with companies covered in its research reports.

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