While we didn't expect such a big FQ1 miss, we correctly predicted the September and December downturn in regional gaming revs. There is more contributing to IGT's woes, however.
"I don't know anyone who wasn't surprised by the December results..." – John Vandemore, IGT CFO
Sorry, John but Hedgeye predicted both the September and December downturns within 1% of actual YoY growth. Check our research on hedgyeye.com. It was simply the math in our model. The chart below shows our monthly projections for 2013 along with the actual YoY growth.
IGT punted FQ1 and gave qualitative guidance that looks even worse than the low end of their previous 2014 range. Management blames sickly regional gaming revenue and its impact on IGT’s yields but the problems are deeper. Yes, the casinos are facing declining demand from slot players but IGT is losing share in gaming operations, ASP’s are under pressure, and 20% annual declines in North American slot demand over the next two years will be tough to overcome.
We turned negative on IGT in our 10/10/13 Black Book “SLOThy GROWTH” (we also attached a video link below). In fairness, we did not expect a 5c miss in Q1 despite getting the December GGR analysis right. IGT usually can pull a few levers to make the quarter, although for the 2nd quarter in a row, they couldn’t. IGT’s full year FY2014 guidance always looked high and management finally confirmed that.
So where does IGT go from here? With the stock clearly underperforming in Q4 and in January – IGT is indicating down another 10% pre-market – it looks pretty washed out. Even with the bad weather, our model is actually projecting a rebound in regional GGR in January – still down low single digits but an improvement over December’s -10%. Is that a reason enough to buy the stock? No, but the next negative catalyst may be a few months off.
While IGT faces 2 years of negative headwinds, we’ve often thought the company should be private and that possibility remains. Strong free cash flow, a low valuation, strong balance sheet, and limited capex needs still hold. Remember that private equity was interested in WMS and one firm actually made it to the final round of the bidding process. IGT’s size is more suitable for private equity and unlike WMS, generates a lot of free cash flow.
With all that said, the risk/reward looks about equal after the open today.