IGT Stock Plunges on Jefferies Downgrade

Posted on: January 4, 2024, 1:28 am.

Last updated on: January 4, 2024, 2:22 am.

Shares of International Game Technology (NYSE: IGT) plunged on Thursday after the stock was downgraded by Jefferies.

Reno Casino Players Megabucks Slot Jackpot Nevada
The IGT Megabucks slot machine. The manufacturer’s shares were downgraded amid concerns that a strategic review was progressing too slowly. (Image: Atlantis Reno)

The research firm lowered its rating on the gaming equipment maker to “Hold” from “Buy” while lowering its price target to $29 from $36. This new forecast implies a 15.3% increase from current levels. Jefferies told clients that the strategic review announced by IGT last June was unlikely to bear fruit in the short term.

At the time, the gaming company said it would explore strategic alternatives for its global gaming and PlayDigital units. These options could include sales, mergers or spin-offs of the companies, or maintaining the segments and increasing investment in those companies. The London-based company believes exploring alternatives for these units can increase shareholder value.

The announcement sparked a rally in IGT shares and contributed to an impressive rise over the next few months. The stock declined in the fourth quarter and that decline continued into 2024 as the stock posted a loss of 9.58% last week. IGT is now 26.32% below its 52-week high, exceeding the definition of a bear market.

IGT sale, spin-off unlikely in the foreseeable future

While IGT has hired Deutsche Bank, Macquarie Capital and Mediobanca as financial advisors, suggesting that the company may be planning moves with the global gaming and PlayDigital units, Jefferies told clients it has no plans to do so in the near future Expect clarity.

Since the announcement of the strategic review, speculation has emerged about potential suitors for IGT’s assets. For example, last September, reports surfaced that Apollo Global Management (NYSE: APO) might make a bid for IGT’s global gaming division.

Such a transaction could fetch a price tag of $4 billion to $5 billion, which is impressive compared to IGT’s current market cap of $5.23 billion. This price range also represents a discount to the valuation assigned to slots competitor Aristocrat Leisure, but no formal offer for IGT’s slots division has yet been made public.

Jefferies added that IGT faces some overhang in its Italian lottery business and that it expects other gaming stocks to outperform them Wheel of Fortune manufacturer this year.

Why IGT transactions are important

IGT may have an incentive to divest its global gaming and PlayDigital units in some form, as it would allow the company to focus on its lucrative lottery business, a segment that arguably doesn’t get the recognition it deserves from the investment community.

The lottery business accounts for 75% of pro forma earnings and is a key driver of earnings before interest, taxes, depreciation and amortization (EBITDA), which is undervalued relative to competing assets. Analysts argue that lottery assets tied to conglomerate-like gaming companies, as is the case with IGT, do not receive the appreciation they deserve from market participants.

Data confirms that domestic lottery sales are surging this year, and the lottery has historically been a segment of the gaming industry that has proven resilient when consumers cut back on discretionary spending.

Source link