International Game Technology released its earnings this week, and the best thing that can be said is, they’re not bad, but they’re not great either. IGT is one of those companies that’s trying really hard to do the right thing and with some success, but there’s nothing to really wow shareholders. There doesn’t seem to be some grand future opportunity that could help it achieve qualitative as opposed to incremental growth, if that.
For now, the proper place for IGT in a gaming stock portfolio is for allocation of cash that you don’t know what else to do with in the short to medium term but don’t want just sitting idle. The prospects for capital growth in IGT beyond a few points are slim, considered from both a technical and fundamental standpoint. Technically, shares could be showing a double top pattern. However, the chances of a serious decline in the short term are also slim.
In line with its position as an average, conservative company, even its dividend at 2.8% is just enough to outpace inflation by a few pennies. Everything about IGT is OK. That’s better than where it was before it merged with GTECH when it was in some trouble, but still little stands out that warrants an enthusiastic buy beyond allocation of leftover cash.
Going through its earnings, you get the feeling that everything has to be “explained”. On the surface the numbers don’t look that great. Dig a little bit under the surface with a few accounting terms and circumstance, and they actually look OK. Point by point through the report all the explanations all seem to add up if taken in isolation. But taken holistically, an investor begins to get the feeling that IGT is putting a lot of energy into explaining itself rather than just showing the goods.
Considering the situation and market that IGT is in, perhaps this is the best it can do without fundamentally changing itself or taking any major risks.
Here are a few examples. The first and most glaring is a net loss of $804M for the quarter, but this includes a $714M non-cash impairment charge and $118M in foreign exchange losses. Financial analysts generally pretend to know what goodwill is and how to quantify it, but a lot of it is just financial voodoo. It’s loosely defined as the value of the premium that another business may be willing to pay to acquire a company over market value, but that definition is a bit circular, because what is market value if not the amount that someone is willing to pay for something else?
The idea of goodwill is mostly anchored to market mood, in other words where we are in the business cycle. In boom times, goodwill goes up. In bust times, balance sheets get impaired and goodwill gets deducted and we can expect the company to sell for less if put up for sale. So as much as we can say that goodwill impairments don’t impact business directly – which is true – they still betray a devaluation in the company. That’s why they are quantified in some sort of calculation, as grey as it may be. The fact that IGT is going through an impairment specifically now raises questions about how it will handle the next recession. My feeling is not too well.
Excluding goodwill, if you have to explain to your shareholders that your technical losses are because of foreign exchange fluctuations and in a magical fairytale land where all fiat currencies are perfectly stable (“on an adjusted basis” in Accountingese), nobody is going to smile.
A second example: Declines in the top line are because of the Double Down social casino sale. The Double Down sale for $825M was the right move because it helped IGT pay down some debt with a segment whose margins were not great. Obviously, the sale will result in revenue declines, and once again, “adjusted for DoubleDown” revenue was up 2%, “adjusted for constant currency,” if we also take into account Lotto concession amortization. That basically means taking into account the cost of running the Lotto segment.
Again, all this is technically accurate, but the excuses pile up and can start to leave an awkward taste in your mouth.
The footnotes don’t stop there though. North America Gaming & Interactive shipped 3,597 gaming machine unites in the quarter compared to 5,238 last year. That can be explained, too. Last year, there was “significant expansion and replacement” activity, which isn’t happening this year. So fine. It’s fine. It’s just not amazing.
But together with fine, there is also potential trouble in the long term due to the kinds of markets that IGT dominates, government lottery being the principle one. Reliance on a government monopoly is never a good long term strategy because eventually it collapses, and IGT is too heavily reliant on it. Italy revenue, mostly lotto, was $418M which declined, but only because of amortization of new lotto concessions, again. North America Lottery revenue was $307M, in line with last year but with no growth only because of less incentives from the New Jersey Lottery. “Adjusted for the timing of the New Jersey contribution” says IGT’s press release, “revenue increased 9% from the prior year”.
You can start to see from here how each number has an explanation embedded in it, and while in isolated cases that’s fine, when you start explaining each and every number, shareholders get the feeling they’re just treading water.
All considered, IGT is a good short term hold over cash at this point. If you want to quickly swipe the dividend you can probably do it since the ex-dividend date is the 27th for an extra 2.8%, but there doesn’t seem to be any compelling reason to hold it beyond then unless you really don’t know what else to do with the cash.
