I Expect This Stock to Outperform in 2017

Powerball and the other assorted government sponsored lotteries are big business. During 2014, players spent $70 billion on legal lotteries in America alone. Global lottery sales bring in about $300 billion each year.

The urge for fast money is so strong that ticket sales on U.S. lottery games average $300 per adult in the 43 states hosting the games.

[ad#Google Adsense 336×280-IA]Putting this number into perspective, it’s more money than U.S. citizens in all 50 states spent on movies, recorded music, sports tickets, books and even video games combined!

While many players participate in the lottery as a fun diversion, some view it differently.

A study published in 2004 revealed a sad truth. Cornell professors, Garrick Blalock, David R. Just, and Daniel H. Simon authored a study called “Hitting the Jackpot or Hitting the Skids.”

The research discovered that local lottery ticket sales are higher in areas of low income.

However, movie ticket sales decline with poverty levels. Bluntly stated, the lottery is viewed as a possible source of income by the destitute, despite the astronomical odds against winning.

Although the odds of winning the Powerball can be as low as 1 in 258 million, there is a way to significantly improve the chances of making the lottery pay you.

A famous person once said that the only way to assure consistently winning at a casino is to own the casino. The same thing goes for the lottery. While the lotteries themselves are owned by governmental entities, there is a single company that is responsible for managing many lotteries around the world.

The company’s shares are in the deep-value zone compared to its peers in the gaming space. It is forecasted to create $500 million in free cash flow in 2017. At that level, the shares trade for just ten times free cash flow. Macquarie Research analyst Chad Beynon recently pointed out that the sector average sits at 15 times free cash flow. At the current level, Beynon calls the company “a deep value and a top name in the industry.”

The company is International Gaming Technologies (NYSE: IGT). IGT is the world’s leading end-to-end gaming company. Its holding company headquarters are in the United Kingdom, with operating headquarters in Rome, Las Vegas, and Providence, Rhode Island.

IGT attracts the industry’s top talent, with more than 12,000 employees across the globe. IGT is uniquely positioned to provide the government-sponsored and commercial gaming industry, with proven solutions for gaming, lottery, interactive, and social. They provide games optimized for every channel across the spectrum, including retail, web, and mobile.

In 2015, the company purchased Gtech, an Italian lottery operator. Since this time, shares have climbed 15% and are set up to move much higher over the long term.

Many investors still have bad taste in their mouths from IGT’s struggling slot machine business that they operated before the Gtech purchase.

IGT is now earning 40% of its revenue from the lottery business and recently renewed a major contract with the Italian lottery. They’ve also renewed a solid contract with the Swedish lottery for video terminals.

The company holds renewable contracts with governments around the world, with the majority in the United States. Any business owner will gladly tell you, a government contract is among the most secure available. Changing vendors in the lottery business is very costly, so it is extremely likely that IGT’s contracts will continue to be renewed.

Make no mistake, the company’s slot machine and casino gaming business is struggling. Market share has been going to newer startup rivals in the space. However, to combat the attrition, IGT has ramped up its research and development budget to $300 million and recently introduced several new products. The products have earned a following and created excitement in the sector.

These innovations have already led to increased sales and shipments. Interestingly, an analyst in the industry thinks the company can expect to experience a 13% sales increase over the next two years thanks to the innovative products.

Risks To Consider: Despite recent innovation, the company remains susceptible to younger, nimbler upstarts in the space. High-technology is always morphing, and IGT fights an uphill battle against a steady stream of newcomers. Also, the next earnings release on March 9 could be a surprise in either direction.

Action To Take: Although I think the numbers will be bullish, conservative investors should wait until after the March 9 earnings announcement to purchase shares. More risk-embracing market players can buy shares on the support of the 50-day simple moving average in the $26.50 zone. My target price is $37.00 per share, and initial stops are suggested at $23.93 per share. I expect the stock to outperform in 2017.

— David Goodboy

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Source: Street Authority