Electronic gaming products operator International Gaming Technologies PLC (NYSE: IGT)
shares have been relatively muted during the sports betting app frenzy. Instead IGT has moved more in alignment with the benchmark S&P 500 index (NYSEARCA: SPY)
. Unlike many of the recent runups, IGT has much more structure both in terms of fundamentals and share price making it a more stabile value play for risk-tolerant longer-term investors. The Company is undergoing a transition to optimize operations moving forward which also falls under the turnaround narrative as a multi-layered omnichannel gaming play. For investors who prefer slow and steady, stalking opportunistic pullback levels should be a priority.
Rise of the Gaming Apps
Shares of gaming and sports betting apps have seen a parabolic surge in recent weeks as stay-at-home mandates have caused bored consumers to discover the excitement of gaming for prizes. The demand for stocks have surged so much that an exchange-traded-fund (ETF) was launched (NYSEARCA: BETZ). Draft Kings (NASDAQ: DKNG) , Penn National Gaming (NASDAQ: PENN) , the parent company of Fan Duel Flutter Entertainment (OTC: PDYPY), Scientific Games (NASDAQ: SGMS) and MGM Resorts International (NYSE: MGM) . The narrative is to draw in and broaden the customer base during isolation mandates to parlay them into the sportsbook as sports leagues resume their seasons. With the stunning loss of tax revenues from COVID-19, states may be more encouraged to pass sports betting legislation. California surprisingly opted against passing such legislation recently, but that doesn’t seem to have deterred other states.
Q1 2020 Earnings Release
On May 18, 2020, IGT released Q1 2020 results for the quarter ending in March 31, 2020. The Company reported $0.08 adjusted earnings-per-share (EPS) versus consensus analyst estimates for a loss of (-$0.02) per share. Revenues came in at $940 million versus analyst estimates of $935.49, but down (-18%) year-over-year (YoY). The Company took a (-$296 million) non-cash goodwill impartment charge to achieve adjust EBITDA of $309 million. The global shutdown of casinos and lower lottery service revenues are responsible for the revenue shortfall. However, higher-margin non-terminal revenues offset the lower terminal product sales. The Company updated its liquidity position as $2.2 billion composed of $1.5 billion in cash and $743 million in revolvers. Cost savings initiatives and capex reduction is targeting $500 million of savings in 2020. Management pulled any further guidance for full-year 2020 due to COVID-19 uncertainty.
Conference Call Insights
Management provided insights into the numbers on the conference call. The product mix of lottery and gaming products are split evenly, and the United States and Italy composed 80% of total annual revenues. Isolation mandates kicked in during mid-March 2020 especially hard on Italy as it was a COVID-19 hotspot. The Company views the peak of the pandemic as Phase I. The Phase II recovery is underway as lockdowns restrictions are lifted and economies restart. IGT receives 65% of global gaming revenues from recurring service revenues with sales of gaming machines accounting for the other 35%. As casinos re-open, this revenue stream should resume. However, social distancing and capacity restraints have a material effect moving forward until Phase III pre-pandemic activity returns. The Company has seen improvement in lottery trends in the U.S. with recovery during April and same-store sales up by mid-single-digit in the last two weeks of May. The Company won new lottery contracts for Brazil and awaiting to hear back on bids from Pennsylvania and RFP for a new contract for New York lottery expiring in August 2020. The Company expects a weak Q2 2020 but expects a second-half recovery lead by lottery over casinos to improve with re-openings. Management pulled guidance but expects Q2 2020 to be the most challenging and impacted quarter related to COVID-19.
Digital Gaming Growth
IGT has been transforming its digital gaming platforms which are well-suited to the current environment. Its digital solutions span lotter, gaming and sports betting with more than 180 teams serving operators and players in 30 countries. The full suite of digital games in Italy saw 40% increase in wagers since the COVID-19 outbreak and triple-digit wagering growth in North America iLottery. While digital gaming still represents a small fraction of total revenues, the rate of growth is “significantly stronger than the pre-COVID levels”.
$750 Million Senior Secured Note Offering
IGT closed $750 million of 5.25% senior secured notes due 2029 on June 19, 2020. Proceeds of $300 million will be used to purchase some of its $1.5 billion 6.25% senior secured notes due 2022 and covered interest expenses related to revolvers and increase cash position. The Company has cut monthly capex spend from $235 million to $185 million and expects total savings to reach $500 million by year-end 2020. The Company set the bar low for Q2 2020 as the most challenging quarter and a second half recovery. Prudent investors can monitor opportunistic pullbacks into and after the Q2 2020 earnings reaction.
IGT Price Trajectories
Using the rifle charts on monthly and weekly time frames provides a broader view of the landscape for IGT stock. The monthly market structure low (MSL) triggered above $8.09 and weekly MSL triggered above $8.82. There are rival market structure high (MSH) triggers on the playing field as well. The daily MSH triggers below $10.62 and weekly MSH triggers under $8.89. The monthly stochastic has a bullish stochastic mini pup with 15-period moving average (MA) near the $11.80 Fibonacci (fib) level. The weekly stochastic has a mini pup triggered above the 5-period MA at $9.63 with upper Bollinger Bands (BBs) at the $14.02 fib target. If the weekly MSH triggers then look for potential opportunistic pullback levels at $8.89 weekly MSH trigger, $8.09 fib and $7.70 weekly MSL trigger. Be careful not to chase this one and await pullbacks pre-earnings release or look to catch a sell-the-news reaction if shares run up into Q2 2020 release.
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