IGT's Critical Divestiture And Focus On Lottery Business Set To Enhance Margins And Attract Investors

Key Takeaways

• Transition to a pure-play lottery business may attract investors, enhancing the stock's value by emphasizing stable, recurring revenue streams.
  
• Repurposing sale proceeds to reduce debt and reward shareholders could positively impact the financial health and earnings.
  
• Reliance on volatile sectors and regulatory uncertainties, along with intense competition and financial constraints, may challenge IGT's earnings, growth, and market leadership.

Catalysts

Operates and provides gaming technology products and services in the United States, Canada, Italy, The United Kingdom, rest of Europe, and internationally.

• The sale of IGT's gaming and digital business to Apollo for $4.05 billion cash provides clear separation of its businesses, which could focus the company on its core operations, especially the global lottery business, potentially improving net margins through enhanced operational efficiency.
  
• Allocating significant portions of the $1.5 billion cash proceeds from the sale to repay debt and for returning capital to shareholders could strengthen the balance sheet and enhance shareholder value, possibly impacting earnings positively.
  
• Establishing the company as a premier pure-play lottery business could attract a new set of investors and re-rate the stock due to its focus on a business with recurring revenue streams and strong profit margins.
  
• The global lottery segment's consistent and growing revenue, backed by long-term contracts and strong positions in key markets, indicates a stable and potentially expanding revenue base.
  
• Initiatives to grow in EMEA, Asia Pacific, and Latin American regions, coupled with the 27% rise in global iLottery sales, suggest potential for significant revenue growth from international expansion and digital transformation efforts.

Assumptions

• Analysts are assuming International Game Technology's revenue will grow by 2.8% annually over the next 3 years.
• Analysts assume that profit margins will increase from 5.2% today to 10.2% in 3 years time.
• Analysts expect earnings to reach $479.9 million (and earnings per share of $2.03) by about September 2027, up from $224.0 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 16.3x on those 2027 earnings, down from 19.5x today. This future PE is lower than the current PE for the US Hospitality industry at 19.5x.
• Analysts expect the number of shares outstanding to grow by 0.78% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 11.58%, as per the Simply Wall St company report.

Risks

• Global earnings and revenue metrics may face pressure due to reliance on high-growth areas like iLottery and gaming digital segments, which are subject to volatile consumer demand and regulatory risks, impacting net margins and earnings.
  
• The divestiture of the gaming and digital business to Apollo introduces potential execution risk and the need to establish the remaining company as a premier pure-play lottery business, affecting revenue and profit consistency.
  
• Competition in the global lottery and gaming segments is intense. IGT's ability to maintain its market leadership and grow its installed base could be challenged, affecting operating income and market share.
  
• The necessity to repay debt and return capital to shareholders following the Apollo transaction may limit financial flexibility, impacting the company's ability to invest in growth opportunities or absorb unforeseen costs, potentially affecting net margins.
  
• Regulatory and antitrust approval processes for the transaction with Apollo and for ongoing operations, especially in new and existing markets, present uncertainties that could delay or derail expected strategic initiatives, impacting revenue growth and EBITDA margins.

Valuation

• The analysts have a consensus price target of $27.25 for International Game Technology based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $35.0, and the most bearish reporting a price target of just $23.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $4.7 billion, earnings will come to $479.9 million, and it would be trading on a PE ratio of 16.3x, assuming you use a discount rate of 11.6%.
• Given the current share price of $21.68, the analyst's price target of $27.25 is 20.4% higher.
• 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.