Benjamin Graham taught that Intelligent Investors must do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk. This is best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another company or by reviewing the 5 Most Undervalued Companies for the Defensive Investor – March 2015. By using the ModernGraham method one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries. What follows is a specific look at how International Game Technology (IGT) fares in the ModernGraham valuation model.
Company Profile (obtained from Google Finance): International Game Technology is a global gaming company. The Company specializes in the design, development, manufacture and marketing of casino-style gaming equipment, systems technology, and game content across multiple platforms: land-based, online real-money and social gaming. The Company operates through two segments: North America, which includes the Company’s operations associated with land-based and online real-money customers located in the United States and Canada, and all customers serviced by the United States-based online social gaming operations; and International, which includes the Company’s operations associated with customers located in all other jurisdictions. The Company generates revenues in three categories: gaming operations, product sales and interactive.
Defensive Investor – must pass at least 6 of the following 7 tests: Score = 5/7
- Adequate Size of Enterprise – market capitalization of at least $2 billion – PASS
- Sufficiently Strong Financial Condition – current ratio greater than 2 – PASS
- Earnings Stability – positive earnings per share for at least 10 straight years – PASS
- Dividend Record – has paid a dividend for at least 10 straight years – PASS
- Earnings Growth – earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period – FAIL
- Moderate PEmg ratio – PEmg is less than 20 – PASS
- Moderate Price to Assets – PB ratio is less than 2.5 or PB x PEmg is less than 50 – FAIL
Enterprising Investor – must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 4/5
- Sufficiently Strong Financial Condition, Part 1 – current ratio greater than 1.5 – PASS
- Sufficiently Strong Financial Condition, Part 2 – Debt to Net Current Assets ratio less than 1.1 – FAIL
- Earnings Stability – positive earnings per share for at least 5 years – PASS
- Dividend Record – currently pays a dividend – PASS
- Earnings growth – EPSmg greater than 5 years ago – PASS
|Value Based on 3% Growth||$13.72|
|Value Based on 0% Growth||$8.04|
|Market Implied Growth Rate||5.23%|
|Net Current Asset Value (NCAV)||-$6.09|
Balance Sheet – December 2014
Earnings Per Share
Earnings Per Share – ModernGraham
International Game Technology is suitable for the Enterprising Investor but not for the Defensive Investor. The Defensive Investor is concerned by the insufficient earnings growth over the last ten years, and the high PEmg ratio, while the Enterprising Investor is only concerned by the level of debt relative to the net current assets. As a result, Enterprising Investors following the ModernGraham approach based on Benjamin Graham’s methods should feel very comfortable proceeding with further research and comparing the company to other opportunities. From a valuation side of things, the company appears to be overvalued after growing its EPSmg (normalized earnings) from $0.81 in 2011 to only an estimated $0.95 for 2015. This level of demonstrated growth does not support the market’s implied estimate of 5.23% earnings growth and leads the ModernGraham valuation model, based on Benjamin Graham’s formula, to return an estimate of intrinsic value below the price.
Be sure to check out previous ModernGraham valuations of International Game Technology (IGT) for greater perspective!
The next part of the analysis is up to individual investors, and requires discussion of the company’s prospects. What do you think? What value would you put on International Game Technology (IGT)? Where do you see the company going in the future? Is there a company you like better? Leave a comment on our Facebook page or mention @ModernGraham on Twitter to discuss.
Disclaimer: The author did not hold a position in International Game Technology (IGT) or in any other company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours. Logo taken from Wikipedia for the sole purpose of identifying the company; this article is not affiliated with the company in any manner.