England- and Wales-based International Game Technology (IGT, Financial), the $3.7 billion world’s largest end-to-end gaming company, reported a 10% year-over-year revenue drop to $1.15 billion and $26.8 million in losses in the first quarter compared to $86.4 million in losses in first-quarter 2016.
International Game actually recorded $119.2 million in profits in the quarter (vs. $187.9 million in year earlier) but recognized a good amount of nonoperating losses, (-)$161.6 million, in relation to its foreign exchange losses and interest expenses thus ending up with poor bottom-line performance.
Despite these losses, the company managed to provide $28 million in profits attributable to noncontrolling interests in the period.
Meanwhile, International Game updated its full-year adjusted EBITDA of $1.6 billion to $1.68 billion (lower vs. previous outlook of $1.68 billion to $1.76 billion). According to filings, this adjustment in the metric was to account for the closing of the DoubleDown transaction by the end of the second quarter and the impact of new taxation on gaming machines in Italy.
“The first quarter of 2017 has been a dynamic period for us.
“Our revenue and profit are consistent with the pattern of the year that we described in March. Year to date, we’ve strengthened our leading positions in global lotteries and begun the rollout of a new generation of gaming machines. We are monetizing noncore assets that will allow us to significantly reduce debt, and we are adopting a new business model for our future participation in the social casino space.” – Marco Sala, CEO of International Game Technology
Ă‚
Valuations
International Game is undervalued compared to its peers. According to GuruFocus data, the company had a trailing price-earnings (P/E) ratio of 14.7 times vs. the industry median of 23 times, a price-book (P/B) ratio of 1.05 times vs. 1.76 times and a price-sales (P/S) ratio of 0.75 times vs. 1.94 times.
The company also had an appealing 4.39% dividend yield with 65% payout ratio.
Average 2017 revenue and earnings-per-share estimates indicated forward multiples of 0.77 times and 11.8 times.
Total returns
International Game performed poorly this year with (-)27% total losses vs. the Standard & Poor's 500 index’s 11.05% gains. In the past five years, the company generated 7.06% (annualized) returns vs. the index’s 15.06%.
International Game Technology
International Game Technology was formed as a business combination shell company in July 2014 under the name Georgia Worldwide Ltd. In September 2014, the company changed its legal name to Georgia Worldwide PLC, and in February 2015 it changed its legal name to International Game Technology PLC.
International Game Technology is the world’s largest end-to-end gaming company, with leading market positions in North America and Italy and the most extensive gaming content library in the world.
The company operates and provides an integrated portfolio of innovative technology products and services across all gaming markets, including: lottery management services, online and instant lotteries, instant ticket printing, electronic gaming machines, sports betting and interactive gaming.
International Game offers business-to-consumer and business-to-business products and services to customers in over 100 countries.
In 2016, International Game generated 34.5% of its revenue in Italy, 48% in the U.S., 1.6% in United Kingdom and other countries.
The company’s reportable segments are as follows: North America Gaming and Interactive, North America Lottery, International and Italy.
North America Gaming and Interactive
In the quarter, revenue in the North America Gaming and Interactive Division dropped by 10% year over year to $305 million (26% of all sales), and it had an operating margin of 21.6% vs. 26.3%.
North America Lottery
In the recent quarter filings, revenue in the lottery segment fell by 10.8% year over year to $281 million (24% of sales), and it had margins of 24.6% vs. 27.9% in the same period last year.
International
International revenue also fell by 11.4% year over year compared to the same period earlier to $164 million (14% of sales). The segment had margins of 4.9% (vs. 17.8% last year).
Italy
Italy revenue in the quarter fell by 9.5% year over year to $402 million (35% of sales; largest), and it recorded margins of 31.2% (most profitable; vs. 33.3% a year earlier).
Sales and profits
In the past three years, International Game had revenue growth average of 6.8%, profit decline average of (-)4.5% and profit margin average of 1.73%.
Cash, debt and book value
As of March, International Game had $463.3 million in cash and cash equivalents and $7.86 billion in debt with debt-equity ratio 2.18 times (vs. 2.5 times in the year earlier period). Equity has increased year over year by $311.4 million while overall debt declined by $366.4 million.
Meanwhile, International Game expects its net debt (debt minus cash) to be in the range of $6.95 billion and $7.15 billion by year end. Currently, the company has a net debt figure of $7.4 billion.
Of the company’s $14.9 billion assets 64% were identified as goodwill and intangible assets while book value has grown 9.5% year over year to $3.6 billion.
Cash flow
In the recent quarter, International Game’s cash flow from operations increased by 38% year over year to $283.7 million despite the losses in the period. The company generated cash flow from its amortization, depreciation, upfront payments to customers (amortization) and foreign exchange loss (net), among others.
Capital expenditures were $172 million leaving the company with $111.6 million in free cash flow (vs. $107.9 million in the year prior period). International Game also provided 11.7% of its free cash flow in payouts to its noncontrolling interests.
In the past three years, International Game generated $1.7 billion in free cash flow, provided $579 million in dividend payouts and raised $2.09 billion in debt (net repayments). The company also provided 39% of its free cash flow in payouts.
Conclusion
International Game’s first quarter did exhibit some form of "dynamism" whereby all of its segments’ revenue fell double digits except for its Italy business (-9.5%). The company, nonetheless, maintained good albeit lower profitability in its businesses. Moreover, International Game carried a significant amount of blue sky elements (goodwill and intangibles) in its assets followed by a very well-leveraged balance sheet.
Cash flow, meanwhile, has been steady in recent years followed by a decent payout average (11.7%).
Five analysts have an average price target of $24.94 per share vs. $18.22 per share at the time of writing. Applying three-year revenue growth and P/S multiple averages and 30% margin indicated a value of $15.9 per share.
In summary, International Game is a pass.
Disclosure: I do not have shares in any of the companies mentioned.
