Slot Machines That Take Bills: Igt's Jackpot?

Gambling has been a giant loser this year, and the mother of all gaming stocks--International Game Technology, the world's largest maker of slot machines and video card games--is down a staggering 40%, to 19 a share. So what has management done about the first major decline in years? Buy back stock. So far, IGT has repurchased 3 million shares, worth $65 million.

"It's the smartest thing to do, because the stock has been so unjustifiably mauled," says a money manager at a major New York hedge fund, who has been accumulating IGT. "Management knows that demand for slot machines, particularly its newest ones that feature `embedded bill acceptors,' is on the rise and that earnings will continue to grow at impressive rates." These bill acceptors take in dollar denominations up to $100.

Analyst Steve Eisenberg of Oppenheimer has been telling clients that IGT is the "most attractive stock in our gaming universe--a pure-play proxy for the worldwide demand for gaming devices." Eisenberg figures IGT will hit 50 in a year or two, based on several upbeat factors the Street hasn't yet taken into account.

One is the rush of orders for the machines from casinos in Nevada and Atlantic City. The paper-money feature lets machines work a lot faster and cuts overhead, since operators need to hire fewer money changers.

BRISK TRADE. IGT Chairman Charles Mathewson figures casinos can increase their volume by 10% to 15% with the new slots. Even though operators normally replace machines only after seven years, they are now buying new ones as fast as possible, he notes. So far, bill-acceptor machines make up only about 3% of casinos' total. Mathewson says the new machines cost $900 more than the old models. Thus, both the casinos and IGT benefit from the new devices.

Mathewson believes IGT will surprise analysts, many of whom think gambling's growth will slow. "The prospects in the U.S. remain great, as we expect new jurisdictions to allow legalized gambling fairly soon," he says. In addition to the lucrative replacement market for slot machines, even more alluring new products are being tested in Canada, he says.

Eisenberg thinks at least four more states may legalize gambling in the next nine months: Alabama, Massachusetts, Pennsylvania, and Texas. He believes IGT's earnings per share will continue to grow at a 30% clip--hitting at least $1.10 this year and $1.45 in 1995, up from 84 cents in 1993.

Before it's here, it's on the Bloomberg Terminal.