The casino industry is one of the most exciting in the market, and has produced some of the best returns in the market since the financial crisis (congrats to anyone who got into Las Vegas Sands Corp. (NYSE:LVS) at the bottom). However, my favorite way to play the sector right now is not with one of the casinos themselves, but with International Game Technology (NYSE:IGT), known to most as International Game Technology (NYSE:IGT), one of the companies that supplies casinos with their games.
I like this approach, especially with all of the casino companies’ aggressive international plans in places like Macau and Singapore, for one simple reason: it is not necessarily dependent on the success of the new casinos, at least not in the intermediate term. Even if the casinos don’t do very well, they will still have stocked their establishments with games from companies like IGT.
Who is International Game Technology?
International Game Technology (NYSE:IGT) designs, develops, and manufactures electronic gaming equipment for the casino industry, including slots, video poker, electronic table games, sports betting equipment, and many other types of gaming machines. They also produce casino infrastructure products, such as integrated modules for machine accounting, game automation, payment processing, and regulatory compliance.
The company also has a thriving online gaming segment, producing infrastructure and applications for remote games. They produce equipment for digital wallet management, fraud detection, customer relations, player analytics, and virtually every other aspect of running real-money games.
International Game Technology (NYSE:IGT) trades at just 13.3 times forward earnings, which is expected to grow at an average annual rate of 8% going forward, which makes the company seem attractively valued. They also pay a modest dividend of just under 2%; however, this has been reduced substantially over the last five years or so.
As far as competition goes, the closest direct competitor is Bally Technologies Inc. (NYSE:BYI) Bally makes most of the same products as IGT, as well as operates a casino, and has grown rapidly in the past year or so. At around 18 times earnings, it may seem expensive; however, the consensus calls for a 15% forward growth rate. Bally is a riskier stock than IGT, not only because of their casino, but because of the limited R&D capability they have in relation to International Game Technology (NYSE:IGT) because of their much smaller size. While Bally certainly could pay off nicely, it is too much of a gamble (pun intended) for a serious investment right now.
Alternatives: Casino Operators
The other way to play the gaming sector is to buy a casino stock directly, such as Wynn Resorts, Limited (NASDAQ:WYNN) or Las Vegas Sands. Las Vegas Sands Corp. (NYSE:LVS) is a very large company with casinos in Las Vegas, Macau, Pennsylvania, and Singapore. As I alluded to in the introduction, the company got hit extremely hard by the financial crisis and traded for as low as $1.38 in 2009 (it is currently just under $60).
This is a very risky play, in my opinion, based on the company’s aggressive Asian expansion plans. It is simply too expensive at 29 times earnings to justify the risk, when in a best case scenario the company hopes to grow at a 15% annual rate.
Wynn, on the other hand, is several times smaller, and operates some of the most upscale casinos in Las Vegas and Macau. They plan on expanding further in Macau, having planned a $4 billion project to open in 2016, which in my opinion may be biting off more than they can chew. A casino venture of this size will need to be very successful in order to be sufficiently profitable, and I just see it as an unnecessary risk. At 24.9 times earnings, it is a bit cheaper than Las Vegas Sands, but still too expensive for the amount of growth it “could” deliver.
The Only Option Here…
In the gaming industry today, I sincerely believe International Game Technology is the only responsible way to play the sector as a long term, serious investment. While Wynn could very well make its shareholders rich, it could just as easily plummet if Chinese gamblers aren’t drawn to their huge undertaking there as much as predicted. The valuation is right, the demand is right, and I think the timing is right to take a long hard look at International Game Technology (NYSE:IGT).
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