The casino operators and game providers may just have got their Christmas gift. Well, they stand to gain only if the report of the Department of Justice (DoJ) being en route to legalize most forms of online gambling within its borders is true.
As reported, the ruling enables the states to allow online lottery tickets and other forms of online gambling games to its residents. The casino operators like Las Vegas Sands Corp. (NYSE:LVS - News) and MGM Resorts International (NYSE:MGM - News) stand to benefit from the ruling given their online presence, as they can now reach out to a larger clientele. Subsequently, the casino game providers including International Game Technology (NYSE:IGT - News) and WMS Industries Inc. (NYSE:WMS - News) would also tank in the gains by providing gambling games online, as demanded.
Why IGT Should Benefit?
This ruling comes at an opportune time for IGT, who is set to launch its first cloud based service, ‘IGT Cloud’, at the Earls Court Exhibition Centre, London, on January 24-26, 2012. By availing the service, casino operators would be able to offer its clients a unique gaming experience. Thereby, it would increase client satisfaction, which would result in higher margins for the operators.
This ruling comes as a boon for IGT, which expects half of the projected revenues ($2 billion to $2.5 billion revenues in the next 3-5 years) to come from core sector and the other half from the emerging initiatives like interactive and cloud computing.
Additionally, analysts expect the casino gaming market to revive in 2012 from its slump in the preceding years, but they doubt if the market would get back to 2007 levels.
The recent acquisition of Entraction Holding AB will also have a positive impact on the top line of IGT from 2013-2014. The acquisition has also provided an exposure to IGT in the online B2B for bingo, poker and sports gambling. Online revenues forms only 5% of the revenue component and company expects to increase that proportion going forward. Expectedly, this DoJ ruling would further boost the online revenues in the long run.
Sluggish replacement sales will remain a primary headwind for IGT in the near term and continued competition from Bally Technologies Inc. (NYSE:BYI - News) and WMS Industries will keep the stock range bound in the near term.
With the IGT Cloud services, we expect IGT to gain traction in the casino gaming industry, as it would likely be well accepted by new casino properties, thereby improving the company’s top line.
Further, we believe that international expansion, an impressive product portfolio, cost-cutting initiatives, reducing dependence on the domestic machine replacement cycle, new contract wins, solid free cash flow and strong growth from the interactive business will drive growth over the long term.
We have a Neutral recommendation on the stock over the long term (6-12 months). Currently, IGT has been allotted a Zacks #3 Rank, which implies a Hold rating on a short-term basis.
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