If you've ever pulled the handle on a one-armed bandit, odds are it was made by International Game Technology. The Reno, Nev., company makes roughly 70% of the slot machines used in casinos worldwide. The problem for this giant is finding new markets to dominate. Luckily, "racinos" -- racetracks or off-track betting parlors with slot machines -- offer the best bet for significant growth in the U.S.
Newly minted racinos in Florida and Pennsylvania should help boost IGT sales, says UBS analyst Robin Farley. In Florida, the company is negotiating with four Broward County racetracks that are licensed to run a total of 6,000 slot machines. Farley, who upgraded IGT shares (symbol IGT) to a buy on Tuesday, expects the company to fill orders for about half of those slots later this year. The Pennsylvania Gaming Control Board will begin licensing racetracks to operate slot machines in September. Farley estimates that Pennsylvania racinos could order 10,000 slot machines from IGT next year and that demand from Pennsylvania racinos alone could ultimately result in orders for 60,000 IGT slots.
Overseas, IGT is putting its chips on Japan and Macau to spur sales growth. Pachinko parlors in Japan are required to replace their slot machines with newer models that comply with gambling regulations within the next 12 months. As a result, Farley expects IGT to sell 30,000 machines to Japanese customers next year. She also sees significant demand for new slot machines in Macau as Las Vegas Sands and Wynn Resorts seek to create a gambling destination similar to that of the Las Vegas Strip in the former Portuguese colony on the southern coast of China.
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Downloadable games might be IGT's ace in the hole. Traditional slot machines are self-contained computers. Slot machines that use downloadable games are terminals controlled by a central server. This technology will allow casinos to choose from a wide array of games and easily customize game content and odds. The technology still has some kinks, but Farley predicts that downloadable games could boost profits by 2009. With the help of downloadable games, she says, IGT's annual shipments could climb from 35,000 to 40,000 machines per year to 60,000.
IGT shares look expensive. At $39, the stock is close to its 52-week high and trades for 29 times the $1.35 per share that analysts expect IGT to earn for the year ending September 30, according to Thomson First Call. Farley upped her target price from $39 to $46 per share.
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