International Game Technology (NYSE:IGT) is the maker of the famous Wheel of Fortune slot machine, and has budding exposure to iGaming, among other pursuits. But an analyst argues investors shouldn’t lose sight of the company’s thriving lottery business.
In a report to clients, Stifel analyst Jeffrey Stantial highlights IGT’s lottery unit, noting that business could prove durable even if the economy slumps. He points out that lottery accounts for 75% of IGT’s pro forma earnings, but commands just 25% of the focus the investment community pays to the gaming company.
Our constructive view on the shares remains anchored by a valuation dislocation for IGT’s cash generative, recession resilient, and fundamentally accelerating lottery business with disproportionate focus paid to IGT’s smaller iGaming business,” writes the analyst.
Stantial reiterates a “buy” rating on IGT with a $36 price target, implying upside of 63.6% from June 7 close. The shares are down 23.66% year-to-date.
IGT Lottery Fighting Conglomerate Discount Blues
Part of the reason IGT’s lottery arm may not be getting the credit it deserves is that the company has other operations, making it a gaming conglomerate of sorts.
The thesis that IGT stock is receiving a conglomerate discount isn’t unreasonable. Lottery assets are cash generators and desirable in the investment community, but often don’t get full credit when the parent company has other lines of business.
Stifel’s Stantial calls the valuation gap between IGT and publicly traded Australian and European peers “overly punitive,” but acknowledges it’s closing.
Still, there’s no getting around the fact that in the gaming industry, lottery is one of the most recession-resistant offerings, and that’s something to consider as analysts and executives express concern about the impact of runaway inflation on consumer spending.
“To the extent the consumer does begin to fade, management highlighted the highly recession resilient nature of lottery demand (largely driven by substitution effect & player psychology) with lottery sales contracting just -0.4% peak-to-trough during 2008/09,” said Stantial of IGT.
Lottery Tailwinds for IGT
Whether it’s iGaming, online sports betting or, to a lesser extent, iLottery, investors are increasingly captivated by and scrutinizing of the gaming industry’s still nascent online endeavors. However, traditional lottery can provide catalysts for IGT.
“While investor focus remains on the higher growth secular opportunities (iLottery, iGaming, cashless, etc.), an ongoing acceleration in traditional lottery sales will have a much more pronounced impact on near-term earnings growth,” notes Stantial.
The analyst adds that if IGT’s same-store sales increase just 1%, that’s a $10 million boost to net revenue. That’s a more efficient, cost-effective sales increase than many online operators currently generate.
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