A leader in designing, manufacturing and marketing games, International Game Technology (IGT) is set to install its sbX system at the High Winds Casino in Miami.
sbX is the first server-based gaming solution that allows its operators to run their own choice of games at any time and also facilitates better casino floor management at lower operational costs. sbX also provides complete freedom to players in terms of game selection and experience (offers a more real-life feel of a casino).
sbX has multiple tools, which spice up the entire gaming experience. sbX Service Window provides a unique player interaction experience at the slot machine. The window provides options regarding information and services that the players and operators can optimize.
sbX Floor Manager allows access to the IGT game library, enabling operators to efficiently mange their casino floor with the mere touch of a button. Moreover, the IGT Floor Manager integrates seamlessly with IGT's AVP machine models.
High Winds Casino will have access to more than 300 games, which will include new game launches in the IGT Game Library.
IGT plans to expand sbX both domestically and internationally, thereby driving growth. More than 40 casinos in 10 countries have already partnered with IGT for this server-based technology.
Most recently, Carson City, Nevada-based Casino Fandango installed sbX in their casino floor to enhance its competitive edge given the system’s flexibility and diversified management functionality.
In April 2011, IGT signed an agreement to install sbX at the Enjoy Group’s Casino Rinconada de Los Andes in Chile. We anticipate that the broadening customer base will boost IGT’s top-line growth over the long term. Moreover, we expect demand for sbX to remain high both domestically and overseas due to its cost effectiveness.
Second quarter Recap
IGT reported strong second quarter 2011 results beating the Zacks Consensus Estimate of 20 cents by three cents. Total revenue was up 1.1% year over year to $492.3 million in the second quarter. Gaming Operations contributed 56.4% to the total revenue whereas Product Sales accounted for the remaining 43.6%. For further details please see IGT Beats; Raises Guidance.
IGT expects EPS in the range of 84 cents to 90 cents per share (up from the previous guidance of 79 cents to 87 cents per share), excluding a gain of 4 cents from certain discrete tax items and a penny per share gain on an investment sale for fiscal 2011.
Currently, the Zacks Consensus Estimate is pegged at 89 cents for fiscal 2011, close to the higher end of the guided range. However, IGT did not provide any quarterly earnings guidance. The Zacks Consensus Estimate is pegged at 22 cents for the third quarter.
We believe that sluggish replacement sales and the lack of new casino openings remain the primary headwinds for IGT in the near term.
Upcoming Opportunities
The casino sector continues to face macroeconomic concerns due to high unemployment levels. This has led many casino operators to reduce their costs, resulting in a slower machine replacement cycle, as operators attempt to preserve their liquidity. This trend appears to be hurting IGT’s long-term growth outlook.
However, we believe that IGT is well positioned to achieve significant growth over the long term based on favorable legislation and court decisions in the second half of 2011.
The Illinois Supreme Court recently heard arguments related to the constitutionality of a construction funding law passed in 2009 that according to analysts would open up the market for more than 40,000 machines to be installed in bars and taverns. The verdict is expected soon.
Moreover, the Illinois legislature is expected to debate the merits of legalizing slots at racetracks and additional casinos, which if sanctioned can further stimulate demand for slot machines. We also believe that IGT is well positioned to expand its business in Texas, Ohio and Massachusetts, once these states legalize gaming.
Our Take
IGT continues to increase its focus in core slot machine and associated technology businesses, as well as its online opportunities as reflected by the Entraction acquisition.
Moreover, the sale of Barcrest to Scientific Games Corp. (SGMS) is a positive for IGT, as the U.K. market mostly comprises low-margin games compared to other regions. Additionally, the sale will help IGT to focus on expanding its business to more profitable regions, in our view.
We believe that international expansion, an innovative product pipeline, focus on reducing dependency on the domestic machine replacement cycle and strong growth from the interactive business will drive significant upside over the long term.
However, sluggish macroeconomic conditions, lack of visibility on replacement sales, very few new openings and increasing competition from WMS Industries (WMS), Bally Technologies Inc. (BYI) and privately held Aristocrat Leisure Limited, will keep the stock range bound in the near term.
We have a Neutral recommendation on the stock over the long term (6-12 months). Currently, IGT has a Zacks #3 Rank, which implies a Hold rating on a short-term basis.
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