International gaming technology: a strong comeback is possible

IInternational Game Technology PLC (IGT) is a global operator of entertainment platforms offering lottery, gaming and betting services through specific technologies available on more than 100 regulated markets around the world. With IGT shares down more than 20% so far this year, given the likelihood of a strong comeback, investors shouldn’t lose faith in the asset.

Thus, I am optimistic on this title.

Reasons for the recent general downward trend in the gaming industry

Energy stocks’ frenzy to take advantage of soaring oil and gas prices caused by sanctions against Russia has not spared gaming stocks this year either.

Although the industry is in steep decline this year, this loss could easily be recouped as several companies are poised to lead the recovery once the current headwinds ease.

Among the names, International Game Technology PLC will most likely benefit from the bright future of the gaming industry.

Fourth quarter and full year 2021 results

In the last quarter of 2021, International Game Technology’s earnings per share and GAAP revenue improved compared to the same quarter of 2020.

On a GAAP basis, earnings for the last quarter of 2021 were $0.09 per diluted share on total revenue of $1.05 billion versus a net loss of $1.18 per diluted share on total revenue of $885 million for the corresponding quarter of 2020.

GAAP earnings per share missed the average analyst forecast by $0.26, while revenue topped the average analyst forecast by $31.6 million.

For the full year 2021, revenue, earnings and cash flow all performed well, the company’s best in the past four years, driven by positive momentum in every business area, including including lottery, games and games of chance.

According to Vince Sadusky, general manager of IGT, these elements have met or exceeded the company’s growth objectives.

Revenue increased 31% from $3.1 billion in 2020 to $4.1 billion in 2021.

Global lottery revenue (about 68.3% of total revenue) increased 27.3% year-on-year. Global Gaming revenue (approximately 26.8% of total revenue) increased 33% year over year. Digital and betting revenue (about 4% of total revenue) grew 44% year over year.

Operating profit and net profit for 2021 were $972 million and $670 million, respectively, compared to a net operating loss of $107 million and a net loss of $839 million in 2020.

The company saw a significant 68.1% increase in cash flow from operations to $1 billion, helping it generate record free cash flow of $771 million, more than double the level of the previous year.

Financial situation of IGT

Strong cash flow generation was accompanied by the proceeds (825 million euros) from the sale of the Italian B2C gaming and sports betting business. These two items resulted in a decrease in net debt of $5.9 billion (from $7.3 billion at the end of 2020) and some other gains.

These consist of a net debt leverage ratio of less than 3.5 times (compared to 6.4 times at the end of 2020) and the reintroduction of the quarterly dividend and share buyback program.

While there is still work to be done, as an Altman Z-Score of 0.82 warning of trouble spots shows, these are important signs of improving financial health. For starters, the Altman Z-Score predicts the likelihood of a company going bankrupt within a few years. A value of 1.8 or less indicates troubled areas, so the likelihood of business failure is high.

However, based on the company’s 12-month outlook and industry growth projections, shareholders can expect a stronger balance sheet.

The stock price could potentially climb sharply to higher levels as the company continues its growth plans, while continued strong momentum in the games space will create a favorable environment.

Industry and Company Outlook

For the full year 2022, the company expects sales of approximately $4.2 billion, while cash flow from operations is expected to be between $850 million and $1 billion.

According to forecasts by ResearchAndMarkets.com reported by PRNewswire on February 24, 2022, the online gambling market, valued at $72.3 billion worldwide in 2021, is expected to grow nearly 10% annually and exceed $130 billion in five years.

The main drivers of market growth are:

• Rapid urbanization associated with the growing global adoption of the Internet and portable devices, including smartphones, to access online games.

• The introduction of ad hoc legislation and technology to encourage transparency and improve the consumer experience should also support growth.

• Sponsorships with prestigious football and running clubs, as these should continue to attract new users.

• In addition, the expected increase in consumer purchasing power and the emergence of bitcoin gambling is expected to boost the market.

IGT Growth Strategy

In the near future, International Game Technology PLC aims to grow by entering into or extending agreements with relevant or national game operators around the world.

The most recent long-term agreements worth mentioning are the one signed on March 21 with Singapore Pools Limited, provider of Southeast Asia’s first computerized lottery, and another signed on March 7 with La Lotería Nacional , the national lottery of Mexico.

The Taking of Wall Street

Over the past three months, six Wall Street analysts have released a 12-month price target for IGT. The company has a strong buy consensus rating based on five buy ratings, one hold rating and no sell ratings.

The international gaming technology’s average price target is $41.17, implying an upside potential of 83.1%.

Valuation and Dividend

The shares change hands at $22.5 for a market cap of $4.57 billion, a P/E ratio of 9.7 and a 52-week range of $15.15 to $32.95.

The stock offers a quarterly dividend of $0.20 per common share with the last payment on March 29, which generates a dividend yield of approximately 3.6%.

Quarterly dividend payments resumed in the last quarter of 2021. In 2020, they were suspended to provide further financial support to the balance sheet during the crisis triggered by the COVID-19 pandemic.

Conclusion

Shares have disappointed so far, but not on issues related to the company, which is showing strong profitability as the balance sheet is set to strengthen.

The online gaming activity is enjoying a positive momentum which should continue in the years to come.

Once the current headwinds of the Ukraine crisis pass, this stock could make a comeback.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.