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Tougher Odds Ahead for IGT

By Christopher Palmeri For G. Thomas Baker, the biggest highlight of his recent trip to London was getting in a taxi and saying "No. 10 Downing Street, please." Baker is the chairman of International Game Technology (IGT), the world's largest maker of slot machines, and it shows just how important a business gambling has become that Baker is sharing his views of the industry with a member of Prime Minister Tony Blair's staff. Britain is considering a liberalization of its gaming laws to allow for larger, Las Vegas-style casinos. "That'll be a good market," Baker says.

IGT has always been focused on expanding into new markets. In the mid-1980s, the Reno (Nev.) outfit blew past former industry leader Bally Gaming by developing new slot technologies, including systems for linking computerized networks of machines for larger "Megabucks" payouts. IGT has rode nearly every industry trend since then, from riverboat and Indian casinos to the latest coinless machines that pay patrons with easier-to-handle paper vouchers.

FEWER REPLACEMENTS? The next few years will be a bit of a gamble for IGT, however. The outfit, which controls an estimated 70% share of the U.S. slot market, has benefited from a major replacement cycle in U.S. casinos. Just four years ago, IGT got more than half of its sales from new machines. As those slots wore out, casinos replaced them with other IGT models. IGT's net income and revenues climbed at an annual average rate of better than 33% over the past three years. For the fiscal year ended Sept. 30, IGT earned $390 million on sales of $2.1 billion. Its shares have quadrupled in price over the past three years.

That's a stellar performance, but IGT's prospects the next few years may not be as bright. If the replacement market starts to cool, which seems likely, IGT will badly need new markets. Rival Alliance Gaming (AGI), which owns the old Bally brand and others, claims a 52% share so far of new video lottery terminals (VLTs) being installed at horse tracks in New York state.

These machines are similar to slots but are considered more palatable in some states because players compete for a lottery-like pool of money rather than against the house. VLTs are a rapidly growing category for the industry, as more racetracks and Indian casinos offer them.

RICH PREMIUM. IGT is beefing up its product line for those markets and continuing to eye new ones. In addition to Britain, it's aiming for new sales in countries such as Macau, Russia, Poland, and Italy. Presently, IGT gets only 11% of its sales from overseas.

Analysts expect IGT's earnings to climb 19% this year, to $1.31 a share, according to Reuters. At $40 per share, IGT trades at a fairly rich 30 times that estimate. Some Wall Street pros say IGT continues to be worth the premium. On Mar. 2, Banc of America Securities analysts David A. Vas and J. Cogan initiated coverage with a buy. Citing IGT's dominant market share and expansion opportunities, they said, "We see no sign of a letup."

Still, IGT has a tough road ahead if it's going to replicate the performance it has achieved in the past few years. For most investors, this stock may be more of a long shot than a sure thing for the near term. Palmeri is a correspondent in BusinessWeek's Los Angeles bureau

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