The leader in slot machine development and manufacturing, International Game Technology, Inc. (IGT), announced the closure of its operations in Japan due to ongoing difficult market conditions and lack of a strategic fit with its core business. The closure is expected to be completed by the third quarter of fiscal 2010.
IGT expects to record approximately $20 million in severance-related and other charges in the second and third quarters of fiscal 2010.
The key goal for IGT in 2010 is to manage costs and focus on operating efficiencies. Given the economic downturn and reduced demand for game play, revenue growth has been hit hard. Hence, IGT is focusing on reducing operational costs to improve profitability. We remain positive on IGT’s cost cutting measures, which will help it generate stronger margins this year.
Long drawn out regulatory actions have negatively affected the Japanese market, which hindered the introduction of new products by IGT and made slot machines less desirable to gamblers. As a result, IGT could sell approximately 3,775 units in Japan in 2009 versus 6,000 units sold in 2008 and 29,800 in 2007, according to analysts.
Thus the decision to close the Japanese operations will help IGT lower unnecessary costs and focus on core activities that could drive growth in fiscal 2010.
Estimate Revisions Trend
IGT’s shares were up 60 cents, or 3.39%, and closed at $18.31 following the announcement of its decision to stop shipping game slots into the Japanese market. The market appears to be negating the news and focusing instead on the company’s increased cost cutting efforts, higher sales of replacement slots, robust margins and impressive cash flows.
IGT recently reported adjusted earnings of 23 cents per share in the first quarter of 2010, beating the Zacks Consensus Estimate of 20 cents. On the earnings call, while management remained cautious on the outlook for casino budgets and spending plans for 2010, they reaffirmed the previously-announced earnings guidance of 77 cents – 87 cents a share for fiscal 2010.
We see further favorable estimate revisions in anticipation of the positive trends in the company’s growth over the next few quarters. The current Zacks Consensus Estimate for the second-quarter of 2010 is 21 cents. In the last 30 days, nine analysts have raised their estimates for the quarter, while 3 have lowered their forecasts. Thirteen out of a total 21 analysts covering the stock raised their full-year 2010 EPS estimates over the last 30 days, while 3 analysts moved in the opposite direction. The company has a history of positive earnings surprises, netting a 7.6% average positive in the last four quarters.
For the full year, the Zacks Consensus Estimate is 92 cents, above the company’s own guidance, and representing an approximately 21.1% improvement from 2009. Analysts believe that the company has given conservative guidance to mute expectations.
Ongoing cost-cutting initiatives, substantial free cash flow, increased international penetration, expansion of gaming operations into new U.S. jurisdictions and rapid replacement of new machines will drive growth. However, the highly leveraged balance sheet and strong competition against Aristocrat Leisure Ltd., Bally Technologies (BYI) and WMS Industries Inc. (WMS) are of concern.
While spending appears to be rebounding, we have yet to see a recovery in the entire leisure and gaming industry. The above factors lead us to maintain our long term Neutral rating on IGT.
Read the full analyst report on “IGT”
Zacks Investment Research
