International gaming tech may be a good stock during recession (NYSE:IGT)

International Game Technology PLC (NYSE: IGT) recently issued helpful guidance, noting that its numbers are generally unaffected by the global recession.Considering the amount invested in product development and new jurisdictions accepting online games, revenue growth probably. We also believe that the separation of the Digital & Betting business segment will be very beneficial to the company’s valuation.

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International Game Technology PLC is a world leader in gaming products such as consoles, lotteries and sports betting.

After reviewing IGT’s latest numbers, I became very interested in IGT’s business profile. IGT reported his double-digit sales growth in Q2 2022 and H1 2022, while global gaming growth led other business segments. Management also reported an impressive operating margin of 22%.

A position at IGT is worth considering as many economists say a recession is possible. Keep in mind that the company’s business model has worked very well in the past, even during recessions.

It’s also very informative that IGT reports an impressive 80% recurring revenue, largely thanks to the company’s lottery business segment and games. Free cash flow is easy to predict, so recurring income is like music to my ears.

Forecast includes higher sales, higher free cash flow and slightly higher capital spending

In my view, investors are more likely to look at other analysts’ forecasts before looking at my numbers. The market forecast includes 0.49% sales growth in 2022 and 0.54% sales growth in 2023. His EBITDA margins for 2022 and 2023 will also remain at around 39% and 40% respectively, and net income will most likely keep him positive in 2022, 2023 and 2024.

When it comes to cash flow statements, there’s a lot to like. Analysts believe FCF will grow from $557 million in 2022 to $743 million in 2023 and $837 million in 2024. Decrease in capital investment.

I tried to get some numbers from the numbers provided by investment analysts. Median figures include net sales growth of approximately 0.54%, EBITDA margin of 40% and FCF/sales of 18%.

Management’s outlook is also optimistic. Upfront revenue is expected to be close to $4.1 billion, with an operating margin of 20% and capital expenditures of approximately $350 million. From my point of view, executives are not much different than other financial advisors.

Balance sheet

As of June 30, 2022, IGT has $673 million in cash and an asset/liability ratio of nearly 1. Goodwill and intangible assets account for nearly 51% of his total assets. Therefore, I believe that impairment of intangible assets could have a material impact on the company’s balance sheet.

Long-term debt is $6.45 billion, which is no small amount. However, the company will have to pay off most of its debt in 2027. In the future, I believe IGT may generate enough free cash flow to renegotiate its debt with banks.

Further product development, new mobile phone app and separation of digital and gaming business segments could result in a valuation of $18.64 per share

In my view, IGT will likely benefit if sports betting continues to grow across the country thanks to regulation in new states. We also believe that greater efforts to develop new mobile phone apps state by state will likely enhance revenue generation. There is no reason to believe that new mobile app and gaming products will not succeed. Keep in mind that the company spends a lot of money on R&D and product development.

The company devotes significant resources to research and development, incurring related costs of $238 million, $191 million and $266 million in 2021, 2020 and 2019, respectively. Source: 20-F

We are also very optimistic about management’s plans for the Digital & Betting business segment. If this business segment were truly sold on its own, in my view the valuation of the business could be more important than it is today. Note that the Digital & Betting business segment is growing at a greater pace than the other business segments. If a financial advisor executes a financial model for each business segment, the total valuation may be greater than his valuation of IGT’s business model as a whole. The company describes its plans in its latest annual report as follows:

As part of this process, the Company will evaluate potential additional listings in its Digital & Betting business segment to provide strategic flexibility while retaining control following the completion of such potential additional listings. You can raise it further. No assurance can be given as to the form and timing of any further listings or other strategic activities resulting from this assessment or whether any such listings or activities will be completed. Source: 20-F

Achieved nearly $4 billion in revenue growth with a revenue growth rate of close to 0.54%, close to the median growth rate previously acquired. This is a rough estimate from management. Also using an EBITDA margin of 40%, an operating margin of 21%, and FCF/sales of about 18%, his FCF in 2033 would be $378 million. Today, discounting future free cash flow from 2024 to 2033 by 6.8% and summing it up yields a net present value of $5.74 billion.

We used an exit multiple of 8.3x to calculate the final value. This translates to a net present value of $3.8 billion. $673 million in cash and approximately $6.45 billion in debt gives the stock a $3.7 billion valuation and a fair value of $18.64.

Issues with lottery authorities, shifting industry reputations, and slow changes in new jurisdictions could lead to an $8.35 per share valuation

Lottery authorities may terminate contracts signed by IGT for a variety of reasons, including failure to approve required budget allocations and outstanding violations. Considering the total revenue from the lottery segment, the termination of the contract would destroy the company’s business model and reduce revenue.

Many of these agreements in the United States permit lottery authorities to terminate the agreement at will with limited notice, and do not specify the compensation we will receive in the event of such termination. Hmm. Source: 20-F

Customer changes, consumer confidence, and many other economic factors can also affect a company’s ability to generate revenue. In addition, the political climate can change the general public perception of the industry. As a result, IGT could suffer reputational damage and lose business partners.

Management also anticipates that new jurisdictional changes could result in new markets and revenue growth. If these processes take longer than expected, it could lead to lower earnings expectations and lower investor expectations. In a worst-case scenario, we believe lower free cash flow expectations will lead to lower stock prices.

Assuming a case scenario of sales growth of about 1% and -0.5%, operating margin close to 17.5%, and FCF/sales of 14.5%, the total FCF is $4.5 billion. Note that my margin is significantly lower than the previous case scenario. We also used a discount of 8.25%. This is significantly larger than the base case. In my view, reduced margins will lead to higher equity costs as traders may sell some shares.

Including a 7.45x exit multiple below the sector median, the terminal value NPV is $2.895 billion. Finally, the company’s valuation remains close to $7.5 billion, with an equity valuation of close to $1.65 billion. Fair price is $8.35 per share.

Best-case scenario: IGT signs another deal in Italy and more in Europe

In my best-case scenario, I’ve included two main assumptions. First, the company’s recent acquisition will do well. The company reported no goodwill impairment and future synergies are expected to be realized. In addition, I had assumed that the company would sign new contracts in Italy and perhaps even more in Europe, and under these optimistic conditions economies of scale could push the company’s EBITDA margin to and his FCF margin could improve.

Since 1998, we are the exclusive licensee of the Italian lotto game, until 2025. Since November 2016, the company’s exclusive Italian Lottery license includes partners as part of a joint venture. Lottoitalia srl ​​is a joint venture between IGT Lottery SpA, Italian Gaming Holding as Arianna 2001 and Novomatic Italia and is the exclusive manager of Italian lottery games. Source: 20-F

In this case scenario, we used a sales growth rate of 1.5%, an EBITDA margin of approximately 40%, and an FCF/sales of 18.2%. With a WACC of 5.55% and an exit multiple close to 8.95, the enterprise value is $11.625 billion. Now, after deducting debt and cash, equity is approximately 5.85 billion, giving a fair value of $29.1 per share.

Conclusion

IGT provided useful guidance. I think we can expect new mobile phone apps and new products. After all, management invests a lot of money in research and development. A possible corporate restructuring to separate he one of IGT’s business segments is also worth considering. In my view, the total valuation could be higher after the separation of the Digital & Betting business segment. Even considering regulatory risks, IGT is worth more than its current price in my opinion.