We came across a bullish thesis on International Game Technology PLC (IGT) from Mustang on ValueInvestorsClub. In this article, we summarize the bulls’ thesis on IGT. International Game Technology shares were trading at $20.10 when this thesis was published, versus a close of $21.37 on August 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 clients worldwide, including 37 of the 48 U.S. state lotteries. This gives the company a dominant position in a stable and recession-resistant market and makes it a unique player in the gaming and lottery industry.
The company’s lottery business is a major revenue generator, generating $1.1 billion in EBITDA annually. This division has proven to be a consistent cash cow, supported by long-term contracts with major customers and a business model that thrives even in times of economic weakness. With 1,000% market share in the lottery space, IGT’s dominance is evident, and the company continues to demonstrate resilience and profitability.
In February, IGT announced a major strategic move: the company would split its business and merge its slot machine business with Everi Holdings (EVRI), another major player in the gaming sector. After the merger, IGT shareholders will retain the lottery business and receive 103.4 million EVRI shares. In addition, EVRI will raise $3.7 billion in debt to refinance existing obligations and distribute $2.2 billion in net proceeds to IGT’s lottery business.
This spin-off and merger strategy is designed to increase value for shareholders. The lottery business is expected to be valued pro forma for the transaction 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 the lottery division should trade closer to 9x EBITDA, indicating significant upside potential.
Although the company faced challenges in 2022 due to post-COVID market adjustments, the lottery business has shown signs of stabilization, with in-store sales returning to positive territory in 2023. The main risks are a potential normalization of EBITDA margins to pre-COVID levels or the loss of a significant contract in Italy, accounting for approximately $200 million in EBITDA. Despite these risks, the downside scenario appears limited, with a $16 downside at current EVRI share prices.
Additionally, there is significant upside potential for 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 company will be fairly leveraged, overall analysis suggests results are trending higher, making IGT an attractive buy for investors seeking a stable, high-margin business with significant growth potential.
IGT is not on our list of the 31 most popular stocks among hedge funds. According to our database, 28 hedge fund portfolios held IGT at the end of the first quarter, compared to 34 in the previous quarter. While we recognize IGT’s potential as an investment, we believe AI stocks promise higher returns and do so in a shorter time frame. If you are looking for an AI stock that is as promising as IGT but trades at less than 5 times its earnings, read our report on the cheapest AI stock.
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Disclosure: None. This article was originally published on Insider Monkey.
