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Slot-maker no sure bet, so cash out


Dear Mr. Berko:

In December 1995 I bought 50 shares of International Game Technology at $12 a share. Today, it’s at $86.30. What do you think of the stock? My broker thinks I should buy 50 more shares. He believes their new coinless slot machines will soon replace everything in Atlantic City, N.J., Las Vegas and Reno, Nev. Please give me your advice.

W.J.. Indianapolis

Dear W.J.:

International Game Technology (IGT-$86.30) thinks coinless slot machines will be in every casino in Reno. According to G. Thomas Baker, chief executive officer of IGT, of the nation’s 600,000 slot machines, 50,000 are coinless and that number will grow by at least 50,000 a year.

Coinless slots are a casino’s dream and here’s why. The player feeds in coins or a paper bill, and the machine credits him with the dollar amount deposited. As he pushes the “bet” button on the machine, it credits his winnings and subtracts his losses. When the player presses the “cash-out” button, he can elect to take a percentage in coin and the remainder in paper voucher about the size of a credit card. That voucher may be used in any machine in the casino or exchanged for cash at a change booth or the cashier’s cage. Though many traditionalists like to listen to a coin “clink” as they snap it into the machine, they’ll soon become accustomed to this new technology.

The coinless slots reduce maintenance costs between 25 percent and 35 percent. They require less attention on the floor, fewer employees to count, stack and wrap change, and they increase playing time by about 15 percent. As a result, the coinless slots improve a casino’s annual return on investment by 14 percent a year.

WMS Industries, Alliance Gaming and Aristocrat Leisure also make these coinless bandits, but IGT (which is home-ported in Reno), with its unique software, owns more than 60 percent of this market. IGT’s expected 2003 revenue of $2.2 billion is twice that of its competition combined.

IGT shares have been stellar performers during the last eight years, running from $11 in 1995 to a high of $87 this year. In that same time frame, its revenues grew from $620 million to an expected $2.2 billion this year while net income exploded from 71 cents a share to an expected $4 this year. IGT’s replacement sales (primarily coinless slots) should reach an annual rate of 50,000 machines next year.

The company has a strong presence in Europe, Japan, Canada, Australia, Latin America and New Zealand and maintains sales offices in those countries. IGT is also prominent in the development, manufacturing and operation of online lottery and pari-mutuel systems as well as expert in developing the hardware and software used in processing these transactions. The hardware consists of terminals located in retail outlets, which feed into a central computer system. The software components process the sales and validate purchased tickets.

In the next three years, IGT’s income could grow by 50 percent on a 35 percent increase in revenues, or more if management continues its active acquisition campaign. Though the numbers support a continuing higher stock price, I have a gut feeling that the shares, while they could move 10 to 15 points higher in the short term, are fully priced.

Yes, Wall Street is bullish on IGT, but I can’t shake a nagging doubt that the coming few years may not be as generous as the industry believes it will. My conclusion flies in the face of the numbers, but sometimes a gut feeling can process a complex series of data better than cold logic and hard numbers. So I must go with my gut and recommend that you sell your 50 shares of IGT. There may be another 10 points in the stock, but I think losing an opportunity to gain 10 more points is a far superior than to risk the possibility of losing a large portion of your gain if you hold the stock.

Please address your financial questions to Malcolm Berko, P.O. Box 1416, Boca Raton, Fla. 33429 or visit his Web site at www.berkoradio.com.

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