Divesting Gaming Business Will Pave Way For iLottery Investments

Key Takeaways

• Sale of Gaming and Digital business allows IGT to focus on lottery operations, enhancing strategic focus and future earnings.
  
• Investments and contracts in iLottery and key regions aim to drive revenue growth and improve cash flow stability.
  
• The shift to a lottery-focused strategy increases dependency on the sector, risking revenue stability amid potential regulatory and market challenges.

Catalysts

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

• The announced sale of IGT's Gaming and Digital business for over $4 billion in cash will allow the company to focus solely on its leading lottery business, expected to enhance its operational efficiency and strategic focus, positively impacting future revenue and earnings.
  
• Significant investment in the iLottery platform and strategic partnerships in multiple jurisdictions are expected to drive iLottery sales growth, contributing to increased revenues and potentially higher margins.
  
• IGT secured long-term contract renewals and new contracts, including a 9-year extension with the Tennessee lottery and significant new contracts in Portugal and France, which are expected to provide steady revenue streams and cash flow visibility for the next decade.
  
• The introduction of new game content and innovations, particularly in Italy and in large jurisdictions like California and Texas, is anticipated to boost same-store sales growth, supporting revenue expansion.
  
• Completion of the Gaming and Digital sale and the implementation of structural cost savings initiatives, such as OPtiMa 3.0, are expected to enhance financial efficiency and profitability, improving net margins and earnings.

International Game Technology Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming International Game Technology's revenue will grow by 1.7% annually over the next 3 years.
• Analysts assume that profit margins will increase from 2.6% today to 8.8% in 3 years time.
• Analysts expect earnings to reach $231.9 million (and earnings per share of $1.15) by about March 2028, up from $65.0 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $270.8 million in earnings, and the most bearish expecting $193 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 30.9x on those 2028 earnings, down from 52.5x today. This future PE is greater than the current PE for the US Hospitality industry at 23.9x.
• Analysts expect the number of shares outstanding to grow by 1.02% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 13.01%, as per the Simply Wall St company report.

International Game Technology Future Earnings Per Share Growth

Risks

• The sale of the Gaming and Digital business, while providing immediate cash, will result in IGT having a singular focus on the lottery business, potentially decreasing revenue diversification and resilience. This shift may affect overall revenue stability.
  
• Variability in U.S. multistate jackpot activity can significantly impact revenue and associated incentive timings, potentially leading to lower-than-expected sales and margins.
  
• High capital expenditures over the next couple of years for securing important contracts in Italy and Texas could suppress net margins and earnings during this period due to the upfront costs associated with these investments.
  
• The expected shift of some operations to cloud-based solutions and infrastructural transitions could incur significant costs temporarily, impacting short-term earnings before long-term efficiencies are realized.
  
• Potential regulatory and market changes, such as the courier model restrictions in Texas, could impact lottery sales and thus revenue, especially if similar actions are taken by other jurisdictions where IGT operates.

Valuation

• The analysts have a consensus price target of $23.833 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 $30.0, and the most bearish reporting a price target of just $19.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $2.6 billion, earnings will come to $231.9 million, and it would be trading on a PE ratio of 30.9x, assuming you use a discount rate of 13.0%.
• Given the current share price of $16.88, the analyst price target of $23.83 is 29.2% 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.