Description

Bottom line:  From IGT’s current price of $17, we see upside potential of >75% to our $30 estimate of Fair Value.  Our FV estimate is based on EV/EBITDA multiple of 9x estimated 2022 EBITDA of $1.5B ($1.655B - $155M minority interest) which = EV of $13.5B, minus $7.32B net debt, = $6.18B equity value, divided by 204.9M shares outstanding = $30.16 per share.  Equates to a market cap / FCF multiple of 13.7x estimated $450M in free cash flow for 2022.

Aviclara181 wrote up IGT in October 2018 and I’d recommend those interested in the stock to read his thorough analysis.  The stock trades at the same price now as it did then (2.5 years ago), and we believe it represents a very compelling risk/reward at current levels.    

IGT operates slot machines, casino management systems, lottery games and systems (76% market share in the U.S. state lotteries), and increasingly sports betting. These businesses have a long history of generating substantial, largely recurring streams of free cash flow, much of which they paid out as dividends pre-pandemic.  IGT’s experience through the COVID-19 ravaged year of 2020 was actually better than most expected.  Total revenues dropped 23% from $4.03B to $3.12B, and adjusted EBITDA from continuing ops declined 31% from $1.45B to $1.01B, and free cash flow dropped 36% from $530M to $340M, but that was still $1.66 per share in FCF, during one of the worst years ever.

Sell-side gaming analysts like Deutsche Bank’s recently raised their price target on IGT to $28, whereas they had a price target of only $9 when the stock price was down to $6.35 per share in April 2020 (we were still calling for $30 per share then).  

IGT’s lottery business was remarkably resilient in 2020 and now represents about 75% of EBITDA.  Lottery revenues dropped only 5.6% in 2020 from $2.29B to $2.16B, while gaming (slots and other gaming machines) dropped 45% in sales from $1.74B to $0.95B.  One area actually grew in 2020 for IGT, their digital & betting revenue, +31% from $130M to $170M.   

IGT suffered from new regulations in Italy during the past two years, a big market (>25% of sales) for them, as Italy’s new government (of the month) raised taxes, banned advertising, and reduced the allowed placements on some of IGT’s offerings.  Those effects were worse than IGT initially estimated.  In Dec 2020, IGT announced the sale of its gaming and sports-betting ops in Italy for €950M in cash, an EV of €1.1B, but only 5.3x EBITDA of €207M for that segment in 2019 (albeit nearly 10x EBITDA on 2020’s unusually depressed result).  The higher margin, more stable lottery business in Italy remains.

IGT’s sales are increasingly from the almost annuity-like cash flows of managing lotteries, where they are #1 in the world; in countries like Italy and in the U.S. where they have 78% market share for the inter-state Mega-Millions, Powerball, and Lotto lotteries.  IGT remains highly leveraged at 6.4x net debt to a very depressed EBITDA in 2020, but that had been worked down to 4.2x by year-end 2019, and they expect to get back to 4x in the next couple of years primarily through FCF generation.  It is less levered than its main competitor, Scientific Games, which has net debt of ~7.4x EBITDA, and SGMS is already trading at over the 9x EBITDA multiple that we target for IGT, and SGMS does not appear to be a better business.  Other pure play lottery peers that have been written up recently here on VIC trade at much higher EBITDA multiples, La Francaise des Jeux (FDJ FP) at over 14x and Pollard Banknote (PBL CN) over 11x.  

The company is controlled by 51% owner De Agostini SpA, an Italian family-owned private equity firm which has been highly successful since family member Marco Drago, now 75, took the reins in 1997.  The CEO, Marco Sala, owns 1.7M shares personally, and is a long-time associate of Marco Drago and served as CEO of some of their prior deals together, almost all of which were highly profitable.  

IGT’s lottery business is a slow-growing cash cow that has been nearly impervious to recessions.  The slot machine business seems to have arrested its market share losses and casinos are spending again on upgrading their slots to the newer high-tech models.  Lastly, legal sports betting is now happening in the U.S. and IGT is already profiting from it in many states, with the aftermath of COVID-19 having increased the willingness for some states to allow i-gaming, such as the sale of lottery tickets via smartphone, which should provide a boost in demand for the already highly popular (however irrational) activity.

We are long IGT and may buy or sell additional shares at any time. This is not a recommendation to buy or sell securities. Please conduct your own research and reach your own conclusion.

Catalyst

- Re-opening pent up demand for casino gaming / slots

- Marco Drago is 75 and has controlled the entity for 20 years since acquiring majority of Lottomatica in Italy since 2002.  He collared some stock around $30 in 2018.  Maybe ready to retire / sell soon.

- Continued deleveraging

- Ongoing cost savings

- Free option on online gaming business