International Game Technology
shares have plunged nearly 27% since the company issued less-than-exciting guidance during its earnings release on July 22, but shares reversed direction Monday after CIBC World Markets upgraded the slot machine maker.
CIBC analyst William Schmitt boosted his rating to sector outperform, the brokerage's highest, from sector underperform, its lowest, saying the current selloff offers a solid entry point for long-term investors. While IGT's once-torrid unit growth has finally started to slow, the analyst said spooked investors have unfairly punished the stock, which rose $1.84, or 6.1%, to $31.89 on the news.
"IGT is a quality company with solid long-term opportunities," said Schmitt in his note, adding later, "The guidance offered by management during its third-quarter earnings call appears to be overly conservative, which we believe is prudent given the current uncertainty surrounding the timing and scope for new machines in California, Pennsylvania and the United Kingdom."
For the last few years, IGT has experienced remarkable growth as casino operators have moved toward cashless machines that spit out receipts instead of coins. While a number of new markets, like the U.K., are expected to drive growth going forward, the timeline for these markets to open up has been uncertain as regulators debate gaming laws. In the meantime, the replacement cycle is waning, comparisons are growing tough and the number of machines IGT is shipping has started to fall.
The slowdown in sales has already started. In the third quarter, IGT sold 35,100 machines, down from 37,500 a year ago, but with gross margins expanding to 54% from 48% a year ago, the sales dip did not impact profits. Going forward, IGT said that it would grow earnings by 15% annually for the next few years, but only ship between 75,000 and 80,000 machines in fiscal 2005, down from an estimated 90,000 machines in fiscal 2004.
The drop-off in the number of machines sold is a disappointment for many investors who were banking on torrid growth in the gaming space and had pushed IGT shares to record highs above $47 in mid-April. With so much speculation in IGT's shares -- and with Merrill Lynch downgrading the company to sell last week in the wake of last week's sales guidance -- investors have been rushing for the exits.
Bears argue there may not be a reason to buy the company's shares for a while, because its earnings-per-share guidance for the next few quarters is essentially flat, ranging between 30 cents and 35 cents a share. It isn't until the back half of 2005, when increased product sales from California's recent gaming expansion kicks in, that the company will show large growth.
But this kind of boom-bust cycle in IGT's shares is nothing new -- and as a number of brokerages, including CIBC, Susquehanna Financial Group and Roth Capital Partners, told investors -- the selloff represents a good buying opportunity, given the fact it's a matter of when and not if new markets open up for IGT.
"Since 1999, we count six 'gut-wrenching' selloffs in IGT like the one recently," said Eric Hausler, analyst at Susquehanna. "Historically, these have reset valuation at a reasonable base level, discounted our speculation on gaming expansion not yet in the numbers and provided a good opportunity for longer-term shareholders."