Investments In Italy And Texas Will Secure Future Stability

Key Takeaways

• Strategic investments in Italy and Texas may affect short-term profitability but aim to stabilize future revenue streams.
  
• Initiatives like iLottery expansion and cost-saving efforts are expected to boost revenue and improve net margins long-term.
  
• Significant capital requirements and strategic investments may strain financial resources and affect earnings due to unpredictable jackpots and high expenditure needs.

Catalysts

Provides lottery solutions in the United States, Italy, rest of Europe, and internationally.

• IGT is expected to invest significant capital in winning and securing contracts in Italy and Texas, which may require additional resources and potentially impact short-term profitability, but could stabilize future revenue streams.
  
• The iLottery sales have been increasing at a double-digit pace, with IGT expanding its platform across multiple jurisdictions, which is likely to boost revenue growth and improve net margins over the long term.
  
• The company is undergoing structural cost savings initiatives, such as OPtiMa 3.0, which aims to deliver substantial efficiencies by 2026, positively affecting future net margins and profitability.
  
• The anticipated $4 billion in cash proceeds from the Gaming and Digital business sale will facilitate significant debt repayment, strengthening the balance sheet and potentially improving earnings through reduced interest expenses.
  
• The ongoing investments in cloud infrastructure and point-of-sale network optimization are expected to enhance operational efficiencies and drive future revenue, but could impact current net margins due to upfront costs.

International Game Technology Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Brightstar Lottery compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Brightstar Lottery's revenue will grow by 1.1% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from -1.2% today to 14.4% in 3 years time.
• The bearish analysts expect earnings to reach $362.9 million (and earnings per share of $1.82) by about July 2028, up from $-29.0 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 11.2x on those 2028 earnings, up from -116.2x today. This future PE is lower than the current PE for the US Hospitality industry at 23.6x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 10.2%, as per the Simply Wall St company report.

International Game Technology Future Earnings Per Share Growth

Risks

• The timing of large U.S. multistate jackpots and product sales can cause quarter-to-quarter variability in financial performance, which may impact both revenues and earnings unpredictably.
  
• Significant capital will be required for upcoming bids in Italy and Texas, which could strain financial resources and potentially affect net margins if expected returns do not materialize.
  
• Investment in new game content and technologies in 2025, while strategic, could also introduce higher upfront costs and impact net income if not recouped through increased sales.
  
• The need for higher capital expenditures, estimated at $400 million to $450 million annually for fiscal years 2025 and 2026, might suppress short-term free cash flow and earnings.
  
• The potential impact of reduced incentives or shortfalls related to U.S. multistate jackpots and LMA contracts may pose a risk to anticipated earnings, as these factors can skew projected financial outcomes.

Valuation

• The assumed bearish price target for Brightstar Lottery is $15.0, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Brightstar Lottery's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $25.0, and the most bearish reporting a price target of just $15.0.
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $2.5 billion, earnings will come to $362.9 million, and it would be trading on a PE ratio of 11.2x, assuming you use a discount rate of 10.2%.
• Given the current share price of $16.6, the bearish analyst price target of $15.0 is 10.7% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.