IGT stock tumbles on downgrade

David Strow

Wednesday, April 3, 2002 | 11:06 a.m.

Shares of International Game Technology tumbled as much as 8 percent this morning after an analyst downgraded the stock and a racetrack slots bill died in Kentucky.

David Anders, gaming analyst at Merrill Lynch, lowered his rating on the Reno-based slot manufacturing giant from "strong buy" to "buy," and his 12-month price target from $80 to $68.

The market responded with a sell-off in IGT shares; the stock opened at $56.35, down nearly 8 percent from Tuesday's close. By midday it traded at $57.98, down $3.17, or 5.2 percent.

In his note, Anders said he remained bullish on IGT's long-term fundamentals, calling it "an attractive investment." But the decreasing likelihood that gaming will expand in 2002 is diminishing, and that removes some of the near-term growth potential from IGT, Anders said.

Specifically, Anders pointed toward the Kentucky Legislature's failure to act on a bill that would have legalized slot machines at that state's famed horse tracks like Churchill Down. Kentucky was the market most expected to approve new gaming this year, but Kentucky lawmakers have shelved that legislation.

"With Kentucky's demise, we are not optimistic that other states, which are still in session, will move forward on gaming this year," Anders wrote.

The failure of the Kentucky bill could prove a negative for other suppliers as well, Anders wrote. That appeared to be the case this morning, as IGT's largest competitors saw their shares decline this morning as well.

Alliance Gaming Corp. fell $1.76 to $28.60, a decline of nearly 6 percent, while WMS Gaming was down 27 cents to $18.55.

Gaming expansion bills have also failed in Maryland, Florida, Indiana and Hawaii so far this year. Pennsylvania, Ohio, Nebraska and Kansas could still consider bills, but Anders was not optimistic on any of the three.

In addition, he said, it is likely that replacement sales to casinos will remain flat in 2002 and 2003, with any gains in sales to midwest markets being offset by lower sales to Nevada casinos.

Anders' earnings estimates for the stock had been based on the expectation of sales to new jurisdictions. Without these new markets, Anders lowered his 2002 earnings estimate from $3.40 to $3.30 a share, and his 2003 earnings estimate from $4 to $3.90 per share.

Still, not everyone is convinced gaming expansion is dead in 2002. William Lerner, gaming analyst with Prudential Securities, said as many as 12 states could still make decisions on gaming expansion by June. He called the decline in IGT's stock price "a buying opportunity," and reiterated his buy rating on the stock.

"The weakness in the stock is entirely due to speculation on what gaming expansion we might or might not see for the balance of the year," Lerner said. "We think that speculation is unfounded. We haven't even scratched the surface with respect to what gaming expansion we might or might not see."

But even if gaming expansion does occur, the number of slots sold to new markets would be "dwarfed" by replacement sales in the next several years, Lerner said.

"Even if we don't see one slot machine sold as a result of gaming expansion in the U.S., the favorable growth story for IGT and other suppliers is still intact," Lerner said.