Analyst: Investment community concerns over Italy weighing down IGT

March 12, 2020 10:45 AM
  • Howard Stutz, CDC Gaming Reports
March 12, 2020 10:45 AM
  • Howard Stutz, CDC Gaming Reports

Casino and lottery equipment provider International Game Technology has been one of the hardest-hit gaming companies during the stock markets’ chaotic reaction to the coronavirus outbreak.

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Macquarie Securities gaming analyst Chad Beynon, who recently accompanied IGT management on the road to meet with investors, said in a research note Wednesday the company’s reliance on business from Italy has panicked market speculators.

Through its contracts as the primary provider for Italy’s government-run lottery, IGT draws roughly 36% of its revenues and 45% of its annual cash flow from those deals.

However, Italy is in the crosshairs of the coronavirus outbreak, which has spooked the investment community. The country has the second-highest number of coronavirus cases behind China, 12,462 as of Wednesday. The death toll has risen to 827.

IGT CEO Marco Sala tried to address concerns over the Italian business a week ago, but that was before the country on Monday banned its 62 million people from all travel unless certified as justified on professional or health grounds. Italy has faced calls to impose even tighter restrictions in the areas with the highest concentration of coronavirus cases.

Chad Beynon, Macquarie Securities

Beynon said IGT’s business model, which includes slot machines, the lottery business, and sports betting systems, has “complicated-to-understand” segments.

“Simply put, IGT is a levered equity with almost 50% exposure to Italy,” Beynon said. However, he believes the investment community has unfairly focused entirely on the Italian lottery segment.

“Boring fundamentals don’t mean (a) broken business,” he said. “Italy can be a zero (cash flow) in 2020 and IGT can still generate $250 million of free cash flow.”

IGT shares fell 10.39% Wednesday to close at $6.73 on the New York Stock Exchange as the Dow declined nearly 1,500 points. On Monday, when the Dow took a historic 2,000-point drop, IGT hit a 52-week low of $5.59. When the Dow rebounded Tuesday, IGT rose 34.5% to close at $7.51.

Beynon believes IGT is worth three times the company’s Wednesday closing price.

“During our meetings, we came away more comfortable with IGT’s debt leverage and covenants,” Beynon said.

Outside of Italy, Beynon said the lottery segment as a whole should grow in the low-to-mid-single digits.

“We remain comfortable with the near-term growth of this business and new opportunities,” Beynon said, citing Mississippi’s newly created lottery, a new system in Texas, and new markets, such as Brazil.

As for the company’s slot machine business, Beynon said IGT grew in the North American market and shipped 21,000 machines during 2019, a 12% year-over-year increase and 8% higher than competitor Scientific Games.

“(IGT’s slot machine division) is in the midst of a turnaround after stabilizing,” Beynon said. “IGT’s market share and product pipeline appear to be on solid footing.”

Beyond that, IGT’s sports betting systems went live in six states during 2019 and are now in 10 jurisdictions.

“IGT has established itself as a leading platform in the U.S.,” Beynon said. “While it may not be needle-moving in the context of IGT’s $1.7 billion of annual (cash flow), IGT should be able to extend its offerings to operators and lotteries in the U.S. in a meaningful way.”

IGT is based in Rome, with additional headquarters in London, Rhode Island and Nevada.

The company was created through a $6.5 billion merger in 2016 between Italy-based lottery company GTech Holdings and slot machine giant IGT. GTech was the acquiring company, with its management overseeing the joint operation, but the business assumed the IGT name.

Howard Stutz is the executive editor of CDC Gaming Reports. He can be reached at hstutz@cdcgaming.com. Follow @howardstutz on Twitter.