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International Game Is Powered by Lottery, Gaming Growth

Does the company warrant a higher valuation?

International Game Technology PLC (IGT) designs, manufactures, and markets electronic gaming equipment. Its GTECH division designs and markets lottery systems to lotteries worldwide, says John Staszak, an analyst with Argus Research.

In April 2015, International Game Technology was acquired by Italian gaming company GTECH S.p.A. in a transaction valued at $6.4 billion. The transaction was financed with $4.7 billion in cash and stock and included the assumption of $1.7 billion in debt.

By 2018, the new company, which is based in the U.K., expects to generate EBITDA of nearly $2 billion. With a market capitalization of $5.7 billion, IGT shares are generally considered mid-cap growth.

IGT reported 3Q17 results on November 14. Operating EPS fell to $0.40 from $0.45 a year earlier, but topped the consensus estimate by $0.16. The decline from the prior year reflected the sale of the DoubleDown online gaming business. Revenue of $1.22 billion was down 4% from the prior year but above the consensus estimate of $1.16 billion.

IGT shares are trading near the top of their 52-week range of $17-$29, and at an EV/EBITDA multiple of 8.7, above the average multiple of 8.0 prior to the 2015 merger with GTECH S.p.A.

However, we believe that a higher valuation is warranted based on the merged company’s solid earnings and free cash flow, continued debt reduction efforts, and strong global lottery business.

We are maintaining our 2017 EBITDA estimate of $1.64 billion. We are also reiterating our 2017 EPS estimate of $1.50 and our 2018 estimate of $1.70. Our long-term earnings growth rate forecast is 7%.

Our upgrade reflects the company’s solid earnings and free cash flow, continued efforts to reduce debt, and steadily growing lottery business.

In addition, although casinos have been slow to upgrade their equipment in recent years, we expect IGT to benefit from the gradual transition to server-based gaming. Our long-term rating is Buy as we expect recurring lottery revenue and growth in the gaming business to result in strong revenue and earnings over time.

John Staszak is an analyst with Argus Research.

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