IGT To Cash In On New Jersey Online Gaming Nod

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New Jersey gamblers and casinos hit the jackpot Tuesday when Gov. Chris Christie approved online gambling within the state's borders.

The new law legalizes Internet gaming for New Jersey residents and allows casinos in the state to set up websites that take bets on games.

With the passage of the bill, New Jersey becomes the most populous state so far, and the third state in the U.S., to allow online gambling after Nevada and Delaware. Nevada became the first state to allow intrastate online poker a few days before the Garden State nod.

The New Jersey measure paves the way for the state's casino operators to offer all legal brick-and-mortar games online to anyone present in the state, says analyst Brian McGill.

That would be a positive for casino game makers, such asInternational Game Technology ( IGT ), the No. 1 maker of slot machines in terms of global revenue.

"The opportunity for IGT would be to place its slots content on operator websites once online gaming is set up," said McGill. "IGT has some of the best content and slot machines in the space, such as their big-title Wheel of Fortune."

The casinos would pay IGT a portion of the revenue they generate from the IGT games people play.

Internet Gaming

McGill says while the impact of legalized Internet gaming in New Jersey on IGT is something he's watching, he hasn't factored it into his estimates because it's difficult to determine a precise impact on earnings per share. It's likely to take a while to get regulations in place, he adds, and it can be delayed.

He estimates the overall size of the New Jersey online gaming market could be $1 billion. Of that, the gaming equipment companies, which includeBally Technologies ( BYI ),SHFL Entertainment ( SHFL ) andWMS Industries ( WMS ), could share an estimated $100 million to $150 million in sales.

He estimates it will take until 2014 for the New Jersey online gambling platform to get up and running and a couple of years for it to grow.

The big opportunity for IGT, says McGill, would be if and when online gaming spreads to more states in the U.S. beyond New Jersey.

"We're just at the beginning of the potential wave of online gaming being legalized over the next few years," he said. "IGT has the ability to be licensed and supply games to those jurisdictions where online gaming is legalized."

IGT's stock closed 1.07% higher the day after the New Jersey measure was signed as investors looked to cash in on the potential for online gaming.

IGT designs, develops and manufactures casino games, gaming equipment and systems technology for land-based and online social gaming and wagering markets. Its far-flung lineup of slots includes some recent additions, such as the "Family Guy," "Sex and the City" and "Judge Judy" video slots.

Lately, the company has been on a bit of a winning streak itself. Profits and sales have been up by double digits the past two quarters.

In the first quarter, earnings climbed 65% to 28 cents a share, ahead of estimates for 24 cents. Revenue rose 19% to $530 million. Analysts polled by Thomson Reuters see full-year earnings rising 21% to $1.26 a share.

Share buybacks that have reduced the comparable share count have helped drive earnings growth, says Deutsche Bank Securities analyst Carlo Santarelli.

But strategic efforts by a new management team headed by Chief Executive Patti Hart, who took the helm in April 2009, have been key to the uptick in IGT's results, analysts say.

Hart became CEO at a time when IGT was hard on its luck.

"It was an industry giant that was losing share to companies like Bally," said McGill.

Enter Hart, who led the efforts that turned IGT around and put it in the position to be the leader in slots again, says McGill. Hart, he adds, has done a good job turning the company around as she's focused on leveraging IGT's game titles and content to more avenues, including online and social gambling.

On the social media front, IGT last January acquired Double Down Interactive, an online social gaming company and developer of the DoubleDown Casino found onFacebook ( FB ). The DoubleDown Casino is the world's largest virtual casino, the company said at the time of the buy.

IGT's North America-based DoubleDown operation generates revenues from the sale of virtual casino chips to players for use within the DoubleDown Casino.

Santarelli says DoubleDown has "provided a nice layer of growth" for the company.

On the first-quarter conference call, Hart said the DoubleDown franchise adds to the company's top-line growth, while holding its position as the No. 3 top-grossing application on Facebook.

As of Jan. 22, the average revenue per daily active user was more than 30 cents, up from 28 cents in the fourth quarter.

Geographic Segments

IGT manages its operations in two geographic business segments, North America and international. Each incorporates all revenue categories, gaming operations, product sales and interactive. Gaming operations and interactive revenue are generated by providing products and services under a variety of recurring revenue arrangements. Product sales revenue is generated by the sale of its products or services.

McGill says the outlook for its business is positive. He expects slot machine replacements in the U.S. and Canada to increase this year to 60,000 from 55,000 in 2012. He says there could be "upside" to that estimate as casino operators focus on their core business of slot machines and away from non-gaming amenities. Recent channel checks indicate trends are favorable right now.

Still, Santarelli says the replacement environment remains tough. He sees more expansion opportunities on the horizon with more states legalizing gambling. He says there's also a large-scale slot machine replacement opportunity in Canada, which is in the process of replacing roughly 40,000 machines over an 18-month span.



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Investing Ideas

Referenced Stocks: BYI , FB , IGT , SHFL , WMS

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