Investors don’t need to spin the reels of slot machines to get lucky, but they can still benefit from the dynamism of gaming device manufacturers International Game Technology (NYSE: IGT) and Light & Wonder (NASDAQ: LNW).
This is the sentiment of B. Riley analyst David Bain, who today initiated coverage of both stocks in notes to clients. He initiated Light & Wonder with a “neutral” rating and a price target of $57, implying a drop from the day’s close of $61.84. For IGT, he had a “buy” rating and a price target of $43, a 55.3% increase from the closing price.
One of the reasons Bain is bullish on IGT is its highly lucrative lottery business. Light & Wonder sold its lottery operations late in 2021.
Bain noted that IGT’s lottery systems and solutions are used by 8 of the world’s top 10 lotteries. The average customer relationship duration is measured in decades, and IGT has achieved a 100% success rate for rebids from the top 10 lotteries. Lotteries are known for their size, recurring income (IGT’s lottery revenue is about 90% recurring), and economic stability.
Bain added that many investors may be overlooking the growth potential of lotteries, which includes a steady influx of new players, increased demand for pricier scratchers, and the emerging iLottery industry.
IGT Trades At Discount
Though casinos continue to make heavy purchases of new slot machines and IGT is one of the leaders in the North American market, its stock trades at a significant discount in comparison to its peers.
“However, IGT trades 20% below the casino supplier peer average. The remaining ~4% of IGT’s business is digital content delivery, a high-growth, asset-light business with a peer average of 9.8x. We believe the current strength across each of IGT’s segments will lead to a re-rating of its valuation by investors,” Bain said.
Gaming accounts for 25% of IGT’s EBITDA, and is the company’s fastest-growing segment. IGT is the company responsible for the popular Wheel of Fortune series of slot machines, but it also has a large portfolio of other slots.
“We examine several valuation scenarios, and each yields the same conclusion: IGT is undervalued. Even applying significant discounts to IGT’s lottery and gaming businesses compared to its peers (despite strong prospects for both divisions, in our opinion) results in a much higher stock price,” Bain stated.
Light & Wonder Evaluation
Bain appreciates certain aspects of Light & Wonder, including its sizable de-leveraging story, due to the sale of its lottery and sports betting divisions. Additionally, it is one of the leaders in the North American slot market.
The analyst’s muted “neutral” rating on the stock appears to be due to its valuation and the potential need for an acquisition to raise near-term EBITDA.
“LNW’s EV/EBITDA is 16% above the casino supplier peer average, and its 6% FCF yield compares to peers at 10%,” Bain concluded. “While we believe LNW’s business mix, product specialty depth, and strong management support a valuation premium to most suppliers, our sum-of-the-parts valuation, which uses above-peer multiples to segment EBITDA, does not justify share price upside from current levels, due to certain risks.”
