International Game Technology (NYSE:IGT) is up 45.22 year-to-date, but even with that impressive showing, one analyst is arguing the stock is underappreciated.
In a note to clients today, Stifel analyst Jeffrey Stantial initiates coverage of the lottery services provider and slot machine manufacturer with a “buy” rating and a $43 price target. That implies upside of almost 75 percent from the Dec. 16 close.
At its core, we view IGT as a lottery business, trading at a gaming multiple, with limited credit for an accelerating core growth algorithm and improved balance sheet,” says Stantial. “While skeptics would argue a conglomerate discount could persist in absence of corporate actions, we see ample catalysts to help close the gap to lottery peers.”
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.
A prime example of that scenario is IGT rival Scientific Games (NASDAQ:SGMS), which unlocked shareholder value by parting with its SG Lottery business. In October, Scientific Games sold that unit to Brookfield Business Partners LP (NYSE:BBU) for $6.05 billion and there were other suitors, underscoring the attractiveness of lottery assets.
IGT Story Remains Compelling
It’s not clear if IGT will pursue a similar path as Scientific Games and jettison its lottery arm, but that unit is a global leader and accounted for 74 percent of the company’s earnings before interest, taxes, depreciation and amortization (EBITDA) in 2019.
The global gaming business, which includes slot machine sales and leasing and gaming management, accounted for the remainder. The company is also actively working to reduce its debt burden and bolster cash flow. With the stock down 18.33 percent over the past month, IGT could be offering the most attractive entry points seen this year and Stantial outlines a catalyst-rich story.
“IGT’s lottery business remains deeply discounted relative to public and M&A comps, with several catalysts to re-rate,” he notes. “IGT looks well-positioned to compete across most high profile growth opportunities (iGaming, sports betting, iLottery, cashless), while current valuation portrays IGT as solely a low growth legacy provider.”
The Stifel analyst adds expectations for IGT gaming unit are “muted” and that the company should be generate ample free cash flow for several years, which could support the return of capital to shareholders.
Corporate Action Possible?
In September, IGT announced the creation of a dedicated digital and betting unit and that might not be fully appreciated by the investment community, either.
“We value the hyper growth Digital & Betting segment at 10.0x Adj. EBITDA, below the low end of most B2B online gaming peer multiples reflecting our relatively conservative views on the online gaming trajectory coupled with meaningful outstanding macro risk,” adds Stantial.
The digital gaming and sports wagering arm will be structured as a new entity — a transaction that should be completed over the next year – and that could eventually lead to the business being spun off from the parent company.
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