IGT stock strengthens on hopes that pro-gambling candidates will be elected

By Liz Benston (contact)

Tuesday, Nov. 5, 2002 | 11:07 a.m.

International Game Technology stock touched a new high Monday on optimism that voters in several states today will elect candidates who favor the expansion of gambling.

The stock of the world's largest slot machine maker peaked at a record $78.40 before closing at $76.46, off 58 cents from Friday's close.

Regardless of the results of today's election, prospects for the Reno-based company remain strong as casinos replace old machines, company executives say.

Over the next couple of years, the slots in most of the major Strip casinos will likely feature some kind of "cashless" technology allowing gamblers to play machines without inserting coins or bills, IGT Chief Executive Thomas Baker told investment analysts during an investor conference call.

"A year ago, people were saying it might work at local places or small casinos ... but it would never work on the Strip," Baker said.

Last week's conference call was hosted by Merrill Lynch as part of a series of executive interviews focusing on creating long-term value for shareholders.

Last month, MGM MIRAGE -- one of the world's largest casino empires and the company behind the greatest number of Strip megaresorts -- announced it would install about 7,000 new "cashless" slot machines at its major casinos nationwide including The Mirage, New York-New York, Treasure Island, Bellagio, MGM Grand and MGM Grand Detroit.

The installations, scheduled for completion by next summer, include new machines and retrofits of existing slots.

IGT stock rose about 5 points on the news -- perhaps the largest single-day increase in the company's history.

The activity was a sign that investors hadn't already factored in the technology's potential, Baker said.

"The announcement was just an affirmation of what we'd been saying for a year."

IGT hasn't disclosed how much the MGM MIRAGE agreement will be worth.

The deal wasn't news to investment banker Bear, Stearns & Co., which had noted to investors earlier last month that a "transition to cashless gaming" at MGM MIRAGE over the next year was imminent. Bear Stearns analyst Jason Ader and others on Wall Street also are predicting that other casino companies will follow the company's lead.

The company's "EZ Pay" voucher systems, which can only be used on IGT-made slots, will prompt casinos to change out their machines sooner than they might have in the past, analysts say.

IGT has set a goal of selling about 50,000 machines into the replacement market next year compared to the 40,000 or so replacement machines sold over the 12 months ending June 30. That compares to the 60,000 to 65,000 machines that are sold to replace existing slots domestically each year, the company says.

Until recently, analysts' bullish recommendations had been tempered by concerns that the slowdown from the 1990s casino boom will hurt the dominant slot supplier. Some casinos also have publicized plans to decrease their lineup of so-called "participation games," which are generally popular jackpot games that can be more expensive for casinos to operate over time because they must be leased rather than bought outright.

Casino customers are realizing a significant cost savings in addition to increased play on machines that don't slow down gamblers with piles of clinking coins, Baker told investors last week.

Some casinos have experienced more than 20 percent returns on their capital expenditures, he said.

"I don't believe the casino industry's had an opportunity for those kinds of returns for a long time."

Another misperception of IGT's growth is that the company's business is centered in Las Vegas, he said.

Tribal casinos make up the company's largest customer segment and are now spread across the entire country in contrast to Las Vegas' concentration of power, he said.

Indian casinos make up about 25 percent of the company's total cash flows compared to the 20 percent limited to Nevada casinos.

"With the growth of IGT the last few years, the diversity of our markets has become more important," he said. "We're in more markets than ever before."

IGT has cornered about 70 percent of the slot machine market nationwide in a business where slots account for more than half of total casino revenues.

Opportunities for growth and change still exist, Baker said.

More competitors have come on the scene, challenging IGT's overall market share. The possibility of expanded gambling abroad also will yield more opportunities for everyone.

"It's more competitive today than it's ever been," he said. "I can't think of any market that has experienced a continued slowdown."