IGT: DON’T FORGET ABOUT THE INTEREST RATE HEDGE

06/08/09 03:09PM EDT

Due to the way IGT funds jackpot expenses, higher prevailing interest rates actually expand the company's margins.  IGT's margins have recently been punished by the precipitous drop in rates.  A 1% increase in general interest rates increases EPS generated by the Gaming Operations segment by approximately $0.04 annually.  The Gaming Ops boost more than offsets the higher interest expense on the credit facility which detracts from EPS by about $0.03 annually per 1% hike in rates.

IGT appears to be a more defensive play than most consumer discretionary stocks for a variety of reasons including pent up demand, low debt, low capital intensity, high free cash flow, and short payback of its product.  The positive margin correlation to interest rates adds to the defensive thesis.

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