Whether International Game Technology PLC (NYSE: IGT) was a slot machine, it would show three diamonds. The stock is up more than 60% from its September 2022 low and on the move after a stellar performance in the third quarter.
When it comes to reopening games, the maker of electronic gaming equipment is proving to be a diamond in the rough. While most airlines and restaurants are experiencing bumpy recoveries, casinos are booming.
According to the American Gaming Association, the US casino industry had its best quarter in the third quarter. Commercial casino operators brought in more than $15 billion as consumers continued to spend on experiences in the face of high gas and grocery prices. And since this excludes revenue from tribal casinos, the overall figure is likely much higher.
The desire of Americans to visit the casinos during economic weakness is good news for IGT. Casinos are more likely to spend on new slots and table games when business is good. This, along with the emergence of online gaming, was evident in the company’s latest report.
How were IGT’s third quarter financial results?
IGT reported an 8% increase in revenue in the third quarter. Leading the way was the Global Gaming division, which recorded a 31% increase in revenue thanks to the reopening of casinos and the reactivation of installed equipment. IGT generates revenue not only from the sale of new equipment, but also from various maintenance and service streams. Revenue fell by 4% in the Global Lottery business.
Earnings per share (EPS) for the third quarter were $0.43, representing a 13% improvement over the prior year period. Revenue and EPS in the lead Wall Street expectations.
As the income statement has strengthened, the balance sheet has also strengthened. IGT ended the period with net debt of $5.1 billion, down 16% year over year. Lower debt is a benefit not only because it reduces interest charges, but also improves the company’s chances of securing additional financing to pursue organic growth or M&A opportunities. At 3.1x, IGT’s net debt ratio is the lowest ever. It’s nothing short of remarkable considering what he endured at the start of the pandemic.
IGT weren’t the only ones with a good third quarter. In September 2022, a lucky player at Foxwoods Resort Casino in Connecticut won over $1.2 million playing IGT’s Wheel of Fortune Pink Diamond slot. Given that the Wheel of Fortune franchise has awarded over 1,100 millionaires since its inception in 1996, it’s easy to see why casino operators (and their visitors) consider these machines must-haves.
What are the prospects for IGT?
Management maintained its 2022 revenue forecast of $4.1 billion to $4.2 billion, with $1 billion expected in the current quarter. At the midpoint, the full-year outlook represents minimal growth beyond 2021 levels. But some growth on a solid base beats a return to 2020 levels, as has been common in other industries. in reopening. In 2021, IGT’s revenue jumped 31% and went from a big loss to a big profit.
In the longer term, the mid cap company has a pair of aces in the hole that should complement the traditional gaming equipment business. Online gaming is becoming a bigger part of the mix as states legalize internet casinos. IGT’s suite of online gaming products offers casinos a cost-effective alternative to developing an in-house online gaming platform.
Sports betting is the real engine of IGT’s growth story. The company’s sports betting solutions are also a quick way to get into the market and avoid being late to the game.
Will the IGT stock continue to rise?
IGT is a three-headed growth monster with promising opportunities in land-based casinos, online gambling and sports betting. Have a diverse trio growth drivers in hand should entice investors to come to the tables.
Another aspect of the investment that might be of interest to buyers is the dividend which was reinstated at the end of last year. IGT currently has a forward yield of 3.3% which is among the best in the consumer discretionary sector. This gives the stock a rare combination of growth and income that has been hard to come by in the market.
Of course, a major economic recession could dampen people’s enthusiasm for in-person or online gaming. So far, Americans’ appetite for a night out at the casino has held up, and whether this trend persists will be a key theme to watch. If it pulls back, expect IGT’s rise to do the same. A setback in regulatory approvals could also slow the stock’s turnover.
Since the third quarter report, a few sell-side analysts have weighed in on where IGT is heading from here. The target price range of $25-$29 implies limited upside after last week’s high volume gap, a reflection of the uncertain economic outlook and tough market for growth names.
Still, with secular long-term headwinds in its favor related to the legalization of online gambling and sports betting, over time, IGT could easily exceed Wall Street’s latest targets. Any macro-related weakness would make the title worth a dice roll.
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