Shares of International Game Technology (NYSE: IGT) are higher by 42.64% year to date, but that scintillating run doesn’t imply a lack of value.
Texas Lottery scratch-off tickets produced by IGT. The company’s lottery unit is flourishing and the stock is undervalued, says an analyst. (Image: Casino.org)
Following a second quarter in which the company’s gaming and lottery units displayed clear momentum, some analysts are increasingly bullish on IGT, with some highlighting the stock’s value proposition. That group includes B. Riley analyst David Bain who, in a note to clients on Wednesday, reiterated a “buy” rating and $43 price target on the stock. That implies upside of almost 43% from the August 1 close.
We expect IGT to generate over ~70% of its CY23E EBITDA from its global lottery business. Although lottery comps trade at ~11x CY23E EV/EBITDA, and recent lottery M&A multiples range from 12.1x to 14.3x, IGT trades at 6.6x CY23E EV/EBITDA,” wrote Bain. “IGT generates ~25% of EBITDA from gaming, and IGT’s consensus gaming EBITDA growth far outpaces all peers, yet IGT trades 15% below the casino supplier peer average and turns below “large” competitors.”
IGT’s lottery business, which accounts for 75% of pro-forma earnings, is a major earnings before interest, taxes, depreciation, and amortization (EBITDA) driver, and undervalued relative to competing assets.
IGT Taking Steps to Clean Up Investment Thesis
While lottery businesses, including IGT’s, are usually highly profitable, cash-generating segments, US investors don’t consistently give those operations the credit they deserve.
That despite Americans’ penchant for throwing billions of dollars annually at various lottery games. To some extent, IGT is afflicted by this scenario as investors tend to assign a “conglomerate discount” to the stock. IGT isn’t sitting idly by. It announced in June that it’s mulling strategic alternatives for its global gaming and PlayDigital units — moves that could clear up the broader investment thesis and put a spotlight on the profitable lottery arm. Those could be attractive assets to prospective buyers.
“In gaming, IGT is the first supplier to report. However, we believe gaming Y/Y EBITDA growth will show better than all peers while gaming metric growth will show above the peer group — IGT is taking market share,” added Bain. “IGT’s 2Q NA install base was +4% Y/Y and +1% Q/Q. 2Q marked IGT’s fourth sequential install base increase and second sequential Y/Y increase.”
Bain observed that strength in IGT’s digital and gaming segments could potentially “lubricate optionality” regarding transactions involving those businesses.
IGT Right Lottery Play
The odds of winning any lottery, let alone Mega Millions or Powerball, are scant, but investors might find significantly better probabilities with shares of IGT, a company with clear leverage to the lottery theme.
Owing to its lottery exposure, IGT benefits from increasing jackpots because those lure more players to the pool.
“While BH23 lottery comparables are difficult given large BH22 jackpots, we believe larger jackpots are becoming more common, and 3Q should benefit $5M+ from higher Powerball and Mega Millions jackpot levels,” concluded Bain. “Notably, NA SSS trends improved Q/Q and into July. Along with unique, long-term growth drivers such as iLottery, we note IGT’s continued geographic expansion/market share gains, with IGT’s Brazil re-entry a strong example of such.”
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