IGT: ANOTHER SHOE TO DROP?

Hopefully, IGT cleared the decks this week on estimates but there is at least one more issue out of their control

 

 

Background: 

On October 10, 2013, we published a Black Book: SLOThy Growth. Since that date, IGT stock is -26% and the S&P 500 Index is +10% on a total return basis. While much has been written about this week's re-organization plan and the subsequent stock devaluation, we feel compelled to warn investors who might be nibbling at the apple at these price levels of an additional negative headline which will cause additional downside pressure on IGT's stock price.

 

Call to Action:

IGT will likely be removed from the S&P 500 Index due to a market cap shortfall.  At present, IGT's equity market capitalization is $3.33 billion making IGT constituent #499 in the S&P 500 Index but will be #500 after Cliffs Natural Resources Inc gets booted from the Index effective April 1. 

 

The Index Committee is constantly reviewing Index composition for addition and deletions based on various criteria - mergers, spin-offs, too small capitalization (see below). IGT clearly falls below the $4 billion threshold.  Ten out of the 17 removals from the S&P 500 in 2013 were due to insufficient market cap including recent removals:  JCP, JDS, and ANF. 

 

Current Index Activity:

  • Cablevision has proposed acquiring Time Warner #111
  • Actavis has proposed acquiring Forest Labs #181
  • Avago has proposed acquiring LSI Logic #452

 

Past Studies On S&P 500 Index Deletion Effects

Chen, Noronha and Singal (2004) concluded that companies deleted from the S&P 500 between 1989 and 2000 declined 8% upon announcement followed by an additional 6% between the announcement day and the effective deletion day. This study further referenced several earlier studies including Lynch and Mendenhall (1997), Dash (2002) and Beneish and Whaley (2002).  All three of these studies found an average loss of +10% between announcement date and effective date, but that there were no long-term effects on share price due to deletion from the S&P 500 Index

 

Details:

The S&P 500 is maintained by the Index Committee, a team of S&P Dow Jones Indices economists and index analysts, who meet on a regular basis. The goal of the Index Committee is to ensure that the S&P 500 remains a leading indicator of U.S. equities, reflecting the risk and return characteristics of the broader large-cap universe on an ongoing basis. The Index Committee also monitors constituent liquidity to ensure efficient portfolio trading while keeping index turnover to a minimum.

 

The Index Committee follows a set of published guidelines for maintaining the index. Complete details of these guidelines, including the criteria for index additions and removals, policy statements and research papers are available on the website at www.spindices.com/sp500.

 

 

The Criteria for Index additions include:

  • U.S. Company - Determining factors include location of the company’s assets and revenues, its corporate structure, its SEC filing type, and its exchange listings.

  • Market Capitalization - Companies with market cap in excess of USD 4 billion. This minimum is reviewed from time to time to ensure consistency with market conditions. This is where IGT fails the sniff test.
  • Public Float - There must be public float of at least 50%.  For people wondering why LVS isn't in the S&P 500, well, now you know.
  • Financial Viability - Companies should have four consecutive quarters of positive as reported earnings, where as-reported earnings are defined as GAAP Net Income excluding discontinued operations and extraordinary items.
  • Adequate Liquidity and Reasonable Price - The ratio of annual dollar value traded to float adjusted market capitalization for the company should be 1.0 or greater. Very low stock prices can affect a stock’s liquidity.
  • Sector Representation - Companies’ industry classifications contribute to the maintenance of a sector balance that is in line with the sector composition of the universe of eligible companies within the defined market cap range.
  • Company Type - All U.S. common equities listed on the NYSE and the NASDAQ stock market.

 

 Criteria for Index Removals

  • Companies that substantially violate one or more of the criteria for index inclusion.
  • Companies involved in merger, acquisition, or significant restructuring such that they no longer meet the inclusion criteria.