Play Your Cards Well

Kushal is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Casinos have always fascinated people, people who put in all their stakes into some gaming machines and let destiny decide their fortunes. But smart investors build their own fortunes.  So how about investing in casinos? Well, while companies running the casinos might not always be a good bet, the suppliers to these companies generally are. 

International Game Technology (NYSE: IGT) is one such company which designs and manufactures computerized casino gaming systems. The Company also develops and manufactures systems that monitor slot machine play and track player activity, as well as wide area progressive systems. IGT derives its revenues from the distribution of casino games, gaming equipment and systems technology for land-based and online social gaming and wagering markets.

The Fundamentals

Here is a company which has paid cash dividends for 39 consecutive quarters (Yes, it is not a misprint), the longest in the gaming industry. But is the dividend good enough for investors?

Let’s have a look at some numbers.

<table> <tbody> <tr> <td> <p><strong>Parameter</strong></p> </td> <td> <p><strong>IGT</strong></p> </td> <td> <p><strong>WMS</strong></p> </td> <td> <p><strong>BYI</strong></p> </td> </tr> <tr> <td> <p>EBITDA Margin</p> </td> <td> <p>35.0%</p> </td> <td> <p>30.2%</p> </td> <td> <p>30.4%</p> </td> </tr> <tr> <td> <p>Forward P/E Ratio (1 year)</p> </td> <td> <p>10.98</p> </td> <td> <p>13.62</p> </td> <td> <p>12.60</p> </td> </tr> <tr> <td> <p>Return on Equity</p> <p>(5 year average)</p> </td> <td> <p>24.5%</p> </td> <td> <p>11.4%</p> </td> <td> <p>33.4%</p> </td> </tr> <tr> <td> <p>Interest Coverage</p> </td> <td> <p>3.9</p> </td> <td> <p>57.6</p> </td> <td> <p>11.5</p> </td> </tr> <tr> <td> <p>Price/Book Value</p> </td> <td> <p> 3.17</p> </td> <td> <p>1.06</p> </td> <td> <p>10.95</p> </td> </tr> </tbody> </table>

The operating margins for all the players are as per the industry standards. The forward P/E multiples for Interntional Game and Bally are lower than the current levels. WMS, with the lowest P/B multiple, may be playing it too safe given the considerably high interest coverage numbers. Bally seems to be well balanced in all respects while IGT needs to bring down its debt levels.

A Look at the Company’s Recent Performance

International Game reported net income of $88.1 million or $0.33 per share for the fourth quarter, higher than $53.4 million or $0.18 per share in the prior-year quarter. The shares surged 8% on the day the results were announced. Revenues at gaming operations declined 2 percent to $264 million, while product revenues increased by 22 percent to $313 million from a year ago. Interactive revenues tripled to $54 million from last year. Total revenue for the quarter increased by 17 percent to $631.1 million from $539.8 million in the same quarter last year, and topped sixteen Wall Street analysts' consensus estimate of $588.67 million.

The company also completed its $400 million accelerated stock buyback which was announced on June 14. Further, in a recent deal IGT agreed to provide mobile games to Paddy Power in a significant extension to the companies' existing partnership.The company is expected to grow by over 15% in the coming fiscal year.

The Other Masters of the Game

Bally Technologies (NYSE: BYI) recently entered into an agreement with Saskatchewan for supply of 650 video-lottery terminals. Earlier this year, the Atlantic Lottery Corporation also selected Bally as a key supplier of VLTs. The company reported better-than-expected quarterly results on strong growth in its gaming equipment segment. The company earned 78 cents per share, 1 cent above analysts' average estimate. BYI expects per-share earnings of $2.95 to $3.30 for the new fiscal year.

WMS Industries (NYSE: WMS) recently entered into a multi-year online content licensing agreement with the British Columbia Lottery Corporation. Shares of WMS lost about a fifth of their value after the company posted fourth-quarter profit below analysts' estimates as rising competition hit its gaming operations segment. However, WMS Industries has signaled that it would accelerate spending in an effort to spark growth and stave off increasing competition.

Now the Big Question: Is IGT Worth a Gamble?

The gaming industry is concerned about the aggressive spending on interactive initiatives given the recent slowdown in the sector and uncertain outlook for the legalization of internet gaming in the United States. The stock market performance for this sector is highly influenced by the financial performance of the companies and government regulations. The growing competition in the sector has also led analysts to lower their expectations. Hence as an investor you can reap huge capital gains from this sector only with the passage of time. However International Game Technologies has distinguished itself as the only dividend paying, investment grade company in the gaming industry.

IGT is offering its initial fiscal 2013 guidance for adjusted earnings from continuing operations of $1.20 to $1.30 per share (EPS). According to I/B/E/S Estimates, analysts on an average were expecting the Company to report EPS of $1.14 for fiscal 2013. On a broad view, International Game is expected to perform well in the coming fiscal year, though you need to keep your eyes and ears open at all times. If you are already holding this one, hold it tight and reap the benefits of smart gambling.

KushalJ2w has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

blog comments powered by Disqus