Resuming coverage of International Game Technology (IGT) yesterday, B Riley Securities analyst David Bain gave it a “Buy” rating and $30-per-share price target. The stock was trading at $22.03 a share at the time of the report.
Deliberately oversimplifying IGT, Bain called it a pure-play lottery company after its upcoming merger with Everi Holdings. He noted that IGT traded at roughly half the value of other lottery-oriented firms.
Even so, Bain observed, a lottery-centric IGT “should park a re-rating catalyst and view additional shares in [the merged entity] as ‘icing on the cake,’ an added incentive to own shares ahead of the merger close.”
As currently planned, IGT’s non-lottery assets (primarily its slot-machine business) would go to the former Everi. IGT would then operate as a lottery-only concern.
“We believe core lottery investors are still digesting the transaction announcement,” Bain wrote. “However, we see little reason for [IGT] to trade at a discount to lottery peers.”
To bolster his case, he observed that 90 percent of that lottery revenue is recurring, as IGT enjoys market-leading positions in the United States and especially Italy. It also ranked second for electronic lotteries.
“We like lottery,” Bain continued. He explained that it’s already well known, due to its sheer visibility and recession-resistant dynamics. What may be under-appreciated, he contended, was its growth, propelled by “additional draws, higher denomination tickets, high growth ilottery, larger jackpots, and increased convenience access points.”
In the U.S., 2023 lottery sales grew five percent to a best-ever $109 billion. Before COVID, lottery growth was four percent year by year. That figure vaulted to 12 percent in 2021.
IGT’s share has grown disproportionately, with ilottery sales up 40 percent in 2023, thanks to growth in existing markets, not new ones. Not only will IGT go live with its ilottery product in Connecticut later this year, “we believe it will become a natural extension of the traditional lottery across most states within the next seven years.”
As for Wall Street resistance, while Bain conceded that non-renewal of IGT’s Italian contract was a “fair investor concern,” he didn’t think it probable that IGT would be displaced. “First, displacing any entire central system, particularly the size of Italy’s Lotto, would be highly disruptive, in our view. Further, the upfront license fee narrows the field to just a few competitors.”
Bain didn’t anticipate “irrational” overtures from competitors to try and take over the Italian lottery landscape. Such illogical behavior, he continued, usually comes “in bids for new growth categories, such as online sports wagering, not traditional lottery (lately, at least).”
Shareholders should be further insulated from any adverse result in Italy, however unlikely, by the IGT/Everi merger dividend, Bain wrote.
The analyst also thought it unlikely that the merger wouldn’t be consummated. He felt that it was insulated by the business-to-business nature of the transaction, whereas most antitrust litigation involved business-to-consumer companies. Also, the combined market share of Everi and IGT would still be below that of Aristocrat Leisure alone.
“While the EVRI shareholder vote could be less certain, we believe the EVRI argument for value creation post-transaction is too high to ignore, even with investor integration concerns,” Bain remarked. He concluded that, even without Everi, IGT would be considerably undervalued, trading 25 percent below its peers in the casino-supplier sector.
