Slot machine market leader International Game Technology (NYSE:IGT) indicated that it is seeing an "uptick" in gaming industry trends, but that is a far cry from just a couple of years ago. It will be some time before the industry sees another heyday, though IGT's stock valuation indicates a quicker recovery.
IN PICTURES: How To Make Your First $1 Million
Fourth Quarter Results
Revenues fell 18.6%, to $514.6 million, as flagship gaming operation sales fell 14.4%, to $283.2 million, though management did point out it is "encouraged by relative stabilization and yields" in the industry. IGT receives a cut of gambling revenue from clients on 85% of its installed base of gaming devices. Product sales fell 23.2% to $231.4 million on the back of a 40.4% drop in North American machine sales and 29% fall in international machine sales. Non-machine sales held up better, rising internationally as sales of parts, cables, and intellectual property rights were still needed by the underlying customer base.
A hefty non-cash charge increased operating expenses and other smaller one-time charges pushed quarterly net income to the red and a reported net loss of 7 cents per diluted share.
Full Year Results
Full-year revenues fell 16.4% to mirror the fourth-quarter difficulties as only international non-machine segment sales were positive. Nonrecurring charges also hit the bottom line, which fell by 53.6% to 51 cents per diluted share. In contrast, cash flow generation improved as higher operating cash flows and lower net capex (capital expenditure less the sale of assets) allowed free cash flow to grow 36.8% to $304.3 million, or $1.03 per diluted share. (Learn more about free cash flow in Free Cash Flow Yield: The Best Fundamental Indicator.)
The Bottom Line
Management mentioned an "uptick" in spending at many major customers over the past two quarters, which MGM Mirage (NYSE:MGM) confirmed last week when it reported its own results and said convection activity is improving. However, it had to write down the value of its CityCenter project and, like archrival Wynn Resorts (Nasdaq:WYNN) with its newest Encore hotel, is stuck with properties that were built using rosier industry forecasts to justify hefty construction price tags.
IGT, along with slot machine rivals WMS Industries (NYSE:WMS) and Bally Technologies (NYSE:BYI), will continue to suffer along with their major customers. Both WMS and Bally expect sales to continue to struggle, and analysts expect IGT to eke out low single digit top line growth for the coming fiscal year, at best. At 20-times trailing free cash flow, shares of IGT need to fall back to the teens before the valuation better reflects that challenging industry trends will persist for the foreseeable future.
Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!
