We came across a bullish thesis on International Game Technology PLC (IGT) on ValueInvestorsClub by Mustang. In this article we will summarize the bulls’ thesis on IGT. International Game Technology shares were trading at $20.10 when this thesis was published, vs. closing price of $21.37 on Aug 12.
International Game Technology (IGT) is a leading global player in the lottery and slot machine industry. With a rich history and a dominant market position, IGT manages lotteries for 92 customers worldwide, including 37 of the 48 U.S. state lotteries. This gives the company a commanding position in a stable and recession-resilient market, making it a unique player in the gaming and lottery industry.
The company’s lottery business is a substantial revenue generator, producing $1.1 billion in EBITDA annually. This division has proven to be a consistent cash cow, supported by long-term contracts with major clients and a business model that thrives even during economic downturns. With a #1 market share in the lottery space, IGT’s dominance is evident, and the company continues to show resilience and profitability.
In February, IGT announced a significant strategic move: it would be splitting its business, with its slot machine operations merging with Everi Holdings (EVRI), another key player in the gaming sector. Post-merger, IGT shareholders will retain ownership of the lottery business while receiving 103.4 million shares of EVRI. Additionally, EVRI will take on $3.7 billion in debt to refinance existing obligations, distributing $2.2 billion in net proceeds to IGT’s lottery business.
This spin-off and merger strategy is designed to unlock value for shareholders. The lottery business, pro forma for the transaction, is expected to be valued at just 6.1x EBITDA at current prices, which appears significantly undervalued given its market-leading position and stable revenue streams. M&A and public company comparisons suggest that the lottery division should trade closer to 9x EBITDA, indicating substantial upside potential.
While the company did face challenges in 2022 due to post-COVID market adjustments, the lottery business has shown signs of stabilization, with same-store sales returning to positive territory in 2023. The key risks involve potential normalization of EBITDA margins to pre-COVID levels or the loss of a significant contract with Italy, which represents approximately $200 million in EBITDA. Despite these risks, the downside scenario appears limited, with a $16 downside case at current EVRI stock prices.
Moreover, there is considerable potential upside in EVRI post-merger, with estimates suggesting a 50% to 180% increase in value based on comparable companies, M&A activity, and historical valuations. Although the combined entity will be fairly leveraged, the overall analysis suggests that the outcomes are skewed toward the upside, making IGT a compelling buy for investors seeking exposure to a stable, high-margin business with significant growth potential.
IGT is not on our list of the 31 Most Popular Stocks Among Hedge Funds. As per our database, 28 hedge fund portfolios held IGT at the end of the first quarter which was 34 in the previous quarter. While we acknowledge the potential of IGT as an investment, our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is as promising as IGT but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article is originally published at Insider Monkey.
