Let's start with the bad news.  Street estimates for 2010 are too high.  Our database of new casinos and expansions shows that industry slots into this market will decline almost 50% in 2010 from a down 2009.  Moreover, IGT's credit facility expires in November, 2010 and we believe the company will refinance by the end of this year at higher rates.  These two factors lead us to a 2010 EPS estimate significantly below the Street, $0.82 versus $1.09, respectively.  Lower EBITDA drives approximately $0.05-0.10 of the lower estimate with the remaining $0.17-0.22 generated mostly by higher interest expense.


The good news is that IGT has taken out $115 million in costs out of production (see our note from earlier today "IGT: COST CUTTING POTENTIAL") and could reduce SG&A and R&D by a total of $130 million if you believe they can revert back to 2006 levels.  IGT is manufacturing at about 35% capacity and with the leaner cost structure, the incremental flow through on accelerating replacement sale should be huge.  The question is when will replacement demand accelerate?  The North American slot floor is as old as it's been in 10 years.  Casino operators' balance sheets need to improve and distressed assets need to be turned over to better capitalized owners before demand picks back up.  We believe that won't happen until 2011.  By that time, pent up demand could generate huge increases in box sales.


In the following analysis, we attempt to provide a core earnings power estimate for IGT assuming: 

  • 1) the leaner SG&A/R&D cost structure
  • 2) the $100 million of production cost cuts is sustainable
  • 3) "normalized" replacement demand
  • 4) IGT's market share normalizes at 40%
  • 5) IGT refinances its credit facility at an all in rate of 6.5% and raises $500 million in new notes at 8.5%




As can be seen from the analysis, IGT has quite a bit of earnings power.  Given the pent up demand, IGT has the potential to "over earn" above the $1.40 for a couple of years should there be a v-shaped recovery. 


Investors playing the long-term recovery card could be handsomely rewarded but they may have to be patient.  Our 2010 estimate of $0.82 is well below the Street at $1.09.  Numbers need to come down before they go up.

Cartoon of the Day: Bulls Leading the People

Investors rejoiced as centrist Emmanuel Macron edged out far-right Marine Le Pen in France's election day voting. European equities were up as much as 4.7% on the news.

read more

McCullough: ‘This Crazy Stat Drives Stock Market Bears Nuts’

If you’re short the stock market today, and your boss asks why is the Nasdaq at an all-time high, here’s the only honest answer: So far, Nasdaq company earnings are up 46% year-over-year.

read more

Who's Right? The Stock Market or the Bond Market?

"As I see it, bonds look like they have further to fall, while stocks look tenuous at these levels," writes Peter Atwater, founder of Financial Insyghts.

read more

Poll of the Day: If You Could Have Lunch with One Fed Chair...

What do you think? Cast your vote. Let us know.

read more

Are Millennials Actually Lazy, Narcissists? An Interview with Neil Howe (Part 2)

An interview with Neil Howe on why Boomers and Xers get it all wrong.

read more

6 Charts: The French Election, Nasdaq All-Time Highs & An Earnings Scorecard

We've been telling investors for some time that global growth is picking up, get long stocks.

read more

Another French Revolution?

"Don't be complacent," writes Hedgeye Managing Director Neil Howe. "Tectonic shifts are underway in France. Is there the prospect of the new Sixth Republic? C'est vraiment possible."

read more

Cartoon of the Day: The Trend is Your Friend

"All of the key trending macro data suggests the U.S. economy is accelerating," Hedgeye CEO Keith McCullough says.

read more

A Sneak Peek At Hedgeye's 2017 GDP Estimates

Here's an inside look at our GDP estimates versus Wall Street consensus.

read more

Cartoon of the Day: Green Thumb

So far, 64 of 498 companies in the S&P 500 have reported aggregate sales and earnings growth of 6.1% and 16.8% respectively.

read more

Europe's Battles Against Apple, Google, Innovation & Jobs

"“I am very concerned the E.U. maintains a battle against the American giants while doing everything possible to sustain so-called national champions," writes economist Daniel Lacalle. "Attacking innovation doesn’t create jobs.”

read more

An Open Letter to Pandora Management...

"Please stop leaking information to the press," writes Hedgeye Internet & Media analyst Hesham Shaaban. "You are getting in your own way, and blowing up your shareholders in the process."

read more