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Takeaway: IGT could be a 20%+ EPS CAGR the next few years yet it trades at only 11x

We were out in Las Vegas last week and back for some more at G2E



Like BYI, IGT looks good heading into G2E but not necessarily for the same reasons.  We’re not sure IGT is going to deliver the same content wow factor as BYI will.  It’s not that IGT management wasn’t positive on its content for the show but who isn’t?  Our takeaways deal more with earnings visibility and growth, capital allocation, and a few upcoming catalysts.

  • Earnings – Obviously, management is not going to provide their earnings expectations but a line by line review of their business yielded good commentary about unit shipments, margins, and improving yields.  With Italy, Canada, and Ohio, unit shipments should be strong in FY2013.  Operating margin will be better sequentially in the September Q.  For 2013, there are some tailwinds.  Higher volumes will help product margins.  For gaming operations, margins will be aided by the depreciation schedule and conversions.  Obviously, the significantly lower share count will be very accretive.  The leveraging of the built out international infrastructure should benefit the margins of both segments.  Finally, gaming ops yields remain a concern.  However, management thinks they will cease to decline YoY in FQ3 of 2013 and while the September and December Q’s will likely be slightly negative YoY, they should look better than the YoY in the June Q.  We remain cautious on yields and are not sold on the content yet.  Obviously, management cannot control the economy or any caps put on the WAPs, but the fact is IGT’s content has lagged.  However, investor expectations for yields are pretty low and the other business levers are leaning positive.   
  • Capital Allocation – It’s very simple.  Current leverage of around 2.5x is the minimum that they will accept.  IGT generates strong free cash flow and there really isn’t anywhere else for them to put their cash (we hope!) other than buy back shares.  I suspect that they find the current price attractive for repurchase.
  • Catalysts – We are expecting a 10k unit order from Western Canada that has been awarded but not announced for political reasons.  IGT should get a good share of this and it will impact fiscal 2013 earnings.  Potentially more near-term, we think Goldman may be done with the accelerated share repurchase program soon.  Following completion, IGT will announce the results and, as we’ve been writing about, the number of shares repurchased will be more than expected.  IGT may also announce additional shares repurchased.  Overall, we would expect that announcement to be received positively.


Here are some details from our notes of the meeting:

  • No ASP issue but investors still concerned about that.  ASPs should be up in FQ4.
  • Game performance has been a yield issue for IGT – economy and competition as well
  • Product margins:  sequential improvement in September Q.  Same with Gaming Ops
  • 5 out of 6 yield buckets are up YoY
  • WAPs is the one category that is down
  • Pricing competition is fierce – cap on WAP is the most common
    • IGT is doing some of that but only in defense
  • Will be a positive announcement when Goldman finishes up the repurchase
  • International performance has been “good”.  Claim international share is growing and growing faster than the US.  Europe has been a drag.  
  • Projected low double digit growth for international in fiscal 2012 and it will be high single digits
  • Pretty much done with international infrastructure so should be able to leverage that
  • Should see flow from Atlantic Lottery Corp in September Q
  • Western Canada impact mostly in June and September 2013
  • IL: probably 50/50 for sale.  30k in shipments and IGT should get 45-55% share.
  • No boxes in Italy; games on Lottomatica boxes in early calendar 2013
  • Columbus – don’t know when it will be recognized
  • Canadian orders should help margins in 2013
  • FQ2 should be the first Q to have higher yields. There is a chance it happens in FQ1
  • 2.5x leverage right now.  This is probably the minimum and “wouldn’t go below that."
  • D&A and conversions are working in favor of IGT’s game ops margins for F2013.  Play levels will be a big driver.
  • F2013 should be a very good volume year
  • December NY Analyst meeting – we view this as management’s outlook is improving 
  • Will get 2013 guidance on November 8th

Financials And The S&P 500

Year-to-date, the Financials SPDR (XLF) is outperforming the S&P 500 (SPY) quite a bit with the XLF up 21.7% compared with SPY, which is only up 15.9% during the same time period. The XLF’s success can be attributed to QE3 and Mario Draghi’s “whatever it takes” comments coming out of the ECB in Europe. 


Financials And The S&P 500  - xlfspy

Quiet August On The Strip

Takeaway: The real question is whether or not slot volumes will continue to fall. Five months of consecutive drops does not bode well for the Strip.

The latest Las Vegas Strip data shows August was quiet in terms of growth. Assuming normal slot and table hold, our model is predicting -3% to +1% growth for August Strip gaming revenue year-over-year change. Slot volume could very well fall again in August, which would mark the fifth consecutive month of declines.


Another metric to note is that McCarran Airport passengers grew 0.3% while Nevada taxi trips fell -1.7% in August. If you’ll recall, there’s a 71% correlation to taxi trips and table volume. 



Quiet August On The Strip  - vegas strip

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The Obama Election

Takeaway: Romney has one chance at a comeback and that is the upcoming debates. Otherwise, consider Obama a winner.

According to the latest data from 270towin.com, President Obama essentially has the election locked up with 97.2% of the wins. Intrade has the President’s odds of being reelected at 76%. Things just aren’t looking good for Romney at this point.


Data for Ohio shows Obama taking a near-six point percentage lead over Romney. If Romney doesn’t win Ohio, he’s basically done for. No Republican has ever won the Presidency without clinching Ohio. Romney has one last chance to win the voting public over and that is with the upcoming debates. If he can lay the smackdown on Obama in a meaningful, engaging way, he may have a shot at a comeback.


The Obama Election - 270towin 100112



The Obama Election - U of Coloaroad Electoral Table

European Banking Monitor

Takeaway: Sovereign swaps moved in tandem with bank swaps in Europe (and around the world), widening across the board.

Below are key European banking risk monitors, which are included as part of Josh Steiner and the Financial team's "Monday Morning Risk Monitor".  If you'd like to receive the work of the Financials team or request a trial please email .


On OMTs Reporting: The ECB has stated that Aggregate Outright Monetary Transaction holdings and their market values will be published on a weekly basis and the average duration of Outright Monetary Transaction holdings and the breakdown by country will take place on a monthly basis. There is no indication that the OMTs has been initiated.


If you’d like to discuss recent developments in Europe, from the political to financial to social, please let me know and we can set up a call.


Matthew Hedrick

Senior Analyst





European Financials CDS Monitor There was widening across the board in European financials last week, with Spanish and Italian banks leading the charge higher. France saw 3 of of 4 French bank swaps widen.    


European Banking Monitor - aa1


Euribor-OIS spread – The Euribor-OIS spread tightened by 2 bps to 13 bps. The Euribor-OIS spread (the difference between the euro interbank lending rate and overnight indexed swaps) measures bank counterparty risk in the Eurozone. The OIS is analogous to the effective Fed Funds rate in the United States.  Banks lending at the OIS do not swap principal, so counterparty risk in the OIS is minimal.  By contrast, the Euribor rate is the rate offered for unsecured interbank lending.  Thus, the spread between the two isolates counterparty risk. 


European Banking Monitor - aa2


ECB Liquidity Recourse to the Deposit Facility – The ECB Liquidity Recourse to the Deposit Facility measures banks’ overnight deposits with the ECB.  Taken in conjunction with excess reserves, the ECB deposit facility measures excess liquidity in the Euro banking system.  An increase in this metric shows that banks are borrowing from the ECB.  In other words, the deposit facility measures one element of the ECB response to the crisis.  


European Banking Monitor - aa3

The Industrial Recession?

Takeaway: Growth is still slowing and the latest data doesn't lie. Companies are careful offering 2013 guidance and with good reason.

There’s no spinning it; the latest industrial data coming out in the US and abroad is weak. It coincides with our macro theme of growth slowing and ISM, durable goods and corporate earnings data backs it up. We’ve seen companies like FedEx (FDX) and Caterpillar (CAT) become cautious about 2013 earnings guidance and revenue growth across large US companies continues to slow.


Looking at the charts below, you can see that the ISM Manufacturing Orders Index has been below 50 for the past three months and is on the decline. And the latest durable goods number was abysmal. Throw in the slowdown that’s been occurring for months now in China and it paints a grim tale. If you wanted proof we’re still in a recession, you certainly have it now.


The Industrial Recession?  - ISMindex


The Industrial Recession?  - durablegoods

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