IGT Upgraded on Constructive Lottery Outlook

Shares of International Game Technology (NYSE: IGT) rallied Thursday after the stock landed an upgrade based on its lottery exposure and reduced risks in Italy.

In a note to clients, Stifel analyst Jeffrey Stantial moved IGT to “buy” from “hold” while boosting his price target on the stock to $26 from $24. That new forecast implies upside of more than 30% from current levels. He said IGT’s plan to spin off and merge its with Everi (NYSE: EVRI) has been an overhang on the stock, but that headwind could abate when the deal closes.

Despite the favorable update healthy lottery trends reported at Q1, shares continue to trade lower which we think now primarily reflects mechanical overhang ahead of Gaming Digital spin-off,” wrote Stantial. “While risk remains that IGT proves dead money ahead of close, we rather risk being too early than late (especially given 2H weighted lottery content launch cadence) while expected timing of close sits well within our NTM investment rating horizon.”

Under the terms of the transaction, IGT investors will own 54% of the new company, while Everi shareholders will control the remainder. The merger is expected to close late this year or in early 2025.

Shares of IGT are off 28.2% year to date and one of the reasons the stock has struggled is concern about the company’s positioning in a retender for Italy’s lottery rights.

That country, which is the Eurozone’s third-largest economy, accounted for a significant chunk of IGT’s 2023 earnings before interest, taxes, depreciation, and amortization (EBITDA) while representing an estimated 22% of adjusted EBITDA in the company’s global lottery segment.

“As such, historically we ve observed meaningful volatility for IGT shares during the contract bid process which alongside deal-related mechanical overhang (see below), led us to downgrade IGT on 3/3 purely on timing with our underlying lottery re-rate thesis still intact,” adds Stantial.

However, IGT provided an encouraging update on the Italy retender during its first-quarter earnings update and, as Stantial observed, is likely to bid against IGT for the Italy contract and that might not happen because parent Flutter Entertainment (NYSE: FLUT) could balk at allocating nearly $1.1 billion in upfront capital to procure the contract.

When IGT announced a strategic review nearly a year ago, it was estimated that it in a sale of its global gaming and PlayDigital units, but the transaction with Everi is valued at $6.2 billion. That could be a sign that IGT deserves more credit for commanding a better-than-expected price.

The deal with Everi will allow the company to focus on its . That’s a segment that arguably doesn’t get the credit it deserves from the investment community. Going forward, IGT might be able to reshape that view because it’s becoming a more lottery-centric story with a cleaner investment thesis.

Analysts argue that when lottery assets are attached to conglomerate-like gaming companies, which is the case with IGT, they don’t get the appreciation they should from market participants.