Benjamin Graham taught that Intelligent Investors must do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk. Â This isÂ 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. Â By using theÂ ModernGraham methodÂ one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries. Â What follows is a specific look at how International Game Tech. fares in theÂ ModernGraham valuation model.
Company ProfileÂ (obtained fromÂ Google Finance):Â International Game Technology (IGT) is a global gaming company specializing 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 is a supplier of gaming entertainment products worldwide. IGT operates in two segments: North America and International. North America consists of the Companyâ€™s operations in the United States and Canada, which comprised 78% of the revenue during the fiscal year ended September 30, 2013 (fiscal 2013). International consists of its operations in all other jurisdictions worldwide, which consists of 22% of the consolidated revenues in fiscal 2013. The Company recognized revenues in three categories, which includes Gaming Operations, Product Sales and Interactive.
Defensive Investor – must pass at least 6 of the following 7 tests: Score = 4/7
- Adequate Size of Enterprise – market capitalization of at least $2 billion – PASS
- Sufficiently Strong Financial Condition – current ratio greater than 2 – FAIL
- 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 = 3/5
- Sufficiently Strong Financial Condition, Part 1 – current ratio greater than 1.5 – FAIL
- 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||$14.15|
|Value Based on 0% Growth||$8.30|
|Market Implied Growth Rate||3.42%|
|Net Current Asset Value (NCAV)||-$6.65|
Balance Sheet – 12/31/2013
Earnings Per Share
Earnings Per Share – ModernGraham
International Game Tech. is not suitable for either the Defensive Investor or the Enterprising Investor. Â For the Defensive Investor, the company fails to qualify for potential investment because of the low current ratio, insufficient earnings growth over the ten year historical period, and the high PB ratio. Â The Enterprising Investor is turned away by the high level of debt relative to the current assets. Â As a result, value investors seeking to follow the ModernGraham approach based on Benjamin Graham’s methods should explore other opportunities, such as through a review of 5 Undervalued Companies for the Defensive Investor or 5 Low PEmg Companies for the Enterprising Investor. Â In terms of a valuation, the company appears to be overvalued currently. Â The company’s EPSmg have only grown from $0.90 in 2010 to an estimated $0.98 for 2014. Â This low level of demonstrated growth does not support the market’s implied estimate of 3.42% earnings growth, leading the ModernGraham valuation model to return an intrinsic value estimate that falls below a margin of safety relative to the current price.
The next part of the analysis is up to individual investors, and requires discussion of the company’s prospects. Â What do you think? Â What value would you put on International Game Tech. (IGT)? Â Where do you see the company going in the future? Â Is there a company you like better? Â Leave aÂ comment on ourÂ Facebook pageÂ or mentionÂ @ModernGrahamÂ on Twitter to discuss.
If you like our valuations, why not check outÂ ModernGraham Stocks & Screens? Â It’s a great way to review the valuations while screening for things like low PE ratio, undervalued companies, etc.!
Disclaimer: Â The author did not hold a position in International Game Tech. (IGT) or any of the other companies listed in this article at the time of publication and had no intention of changing that position within the next 72 hours.
Logo taken from the Wikipedia; this article is not affiliated with the company in any manner.