OPtiMa 30 And iLottery Boost Growth Amid Revenue And Debt Concerns

Key Takeaways

• Resource reallocation and cost optimization aim to enhance profitability and support sustainable growth through initiatives like OPtiMa 3.0 and strategic investments.
  
• Expanding iLottery and international sales, plus new pricing strategies, are expected to boost revenue and improve financial health by reducing debt.
  
• High debt levels and workforce reductions amid declining sales and divestitures pose risks to revenue growth and financial flexibility.

Catalysts

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

• The launch of OPtiMa 3.0 aims to rightsize costs by realigning and optimizing general and administrative activities, targeting $40 million in annualized cost savings by the end of 2026. This should improve net margins and increase overall profitability.
  
• Increased focus and investment in iLottery, along with expanding game portfolios and new market entries, have driven iLottery sales up over 26% in the third quarter. This is expected to continue driving revenue growth in the future.
  
• The sale of the gaming and digital business to Apollo, which is expected to close by the end of the third quarter of 2025, will yield proceeds of $4.05 billion. $2 billion of these proceeds will be used for debt reduction, improving the company's balance sheet and potentially boosting earnings.
  
• The strategic reallocation of resources into expansion areas like instant ticket printing and international sales development is anticipated to enhance revenue streams and support sustainable future growth.
  
• The announced price increase for Mega Millions tickets from $2 to $5 in April 2025 is expected to result in larger jackpots and more frequent wins. This could drive incremental revenue growth through increased player participation and higher ticket sales.

International Game Technology Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming International Game Technology's revenue will decrease by -21.1% annually over the next 3 years.
• Analysts assume that profit margins will increase from 2.9% today to 13.4% in 3 years time.
• Analysts expect earnings to reach $283.7 million (and earnings per share of $1.58) by about November 2027, up from $126.0 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 22.6x on those 2027 earnings, down from 30.4x today. This future PE is lower than the current PE for the US Hospitality industry at 24.4x.
• Analysts expect the number of shares outstanding to decline by 3.8% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.75%, as per the Simply Wall St company report.

International Game Technology Future Earnings Per Share Growth

Risks

• The 6% decline in Q3 global same-store sales, driven by unfavorable multi-state jackpot comparisons, could negatively affect revenue growth.
  
• The restructuring charge and anticipated 3% workforce reduction through OPtiMa 3.0 signal cost pressures that may impact net margins in the short term.
  
• The divestiture of the gaming and digital business, projected to conclude by late 2025, introduces uncertainty about future revenue streams and market presence.
  
• Volatility in U.S. multi-state jackpot activity has historically impacted revenues, and the ongoing muted environment could further pressurize earnings.
  
• High debt levels and a commitment to $2 billion in debt reduction may restrict future financial flexibility and capital allocation for growth initiatives.

Valuation

• The analysts have a consensus price target of $27.14 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 $22.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $2.1 billion, earnings will come to $283.7 million, and it would be trading on a PE ratio of 22.6x, assuming you use a discount rate of 9.8%.
• Given the current share price of $18.97, the analyst's price target of $27.14 is 30.1% 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.