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Analysts Attempt Reversing IGT Stock Slide

25 January 2002

by David Strow

LAS VEGAS = Jan. 25, 2002 --Despite reporting strong earnings growth, many of International Game Technology's investors headed for the exits Thursday.

At 70 cents per share, IGT's net income for the quarter ending Dec. 31 was 6 cents ahead of analyst estimates for the quarter, and up 9 percent from the year-ago period. Yet IGT's stock fell sharply, $4.92 to $63.50 in Thursday trading.

The heavy selloff was widely criticized by gaming analysts this morning, who almost universally urged investors to buy shares of the Reno-based slot giant. One firm, Deutsche Banc Alex. Brown, even upgraded the stock to "strong buy."

"Overblown," Bear Stearns gaming analyst Jason Ader called the selloff.

"Unwarranted," said Merrill Lynch gaming analyst David Anders.

The bullish analyst opinions appeared to be reversing the tide, though only slightly; after an initial selloff, IGT moved up 21 cents to $63.71 this morning.

Warranted or not, investor concerns centered on three factors at IGT.

First was a sharp decline in IGT's sales to the U.S. market. During the quarter, IGT said it sold 12,600 machines in the United States, down from 15,000 in the year-ago period. IGT was still able to post an overall increase in slot machine sales, however, because of a sudden jump in machines sold in Japan.

IGT blamed two factors for the domestic decline -- a sharp decrease in demand from California's Indian casinos and a "softening" in the Nevada market.

However, Anders noted, "we believe that the Las Vegas environment continues to significantly improve, and accordingly, maintain that the order flow, both for unit sales and recurring revenue games, will accelerate over the next nine to 12 months."

The second concern dealt with IGT's participation slot machines. Revenues from these machines were up more than 30 percent. But the 26,200 participation machines IGT had installed on Dec. 31 was completely unchanged from three months before.

If IGT added new machines during the quarter, they were likely offset by Harrah's Entertainment Inc., which announced a week ago that it had removed 500 to 600 participation slots from its casino floors. Much of these were believed by analysts to be IGT games, and this was viewed as a negative by many investors.

But Ader said concerns about casinos removing participation slots are "not a new concept to the industry."

"We believe this issue is largely overblown and would expect a significant improvement over the next several quarters, with the third and fourth quarter showing the most strength," Ader wrote. IGT's "backlog" of ordered but as-yet uninstalled participation games now stands at 2,800, up 50 percent from September, Ader noted.

The most controversial reason spurring the sell-off focuses on guidance IGT gave investors on Thursday's conference call. During the conference call, IGT officials said they were "comfortable" with analyst expectations for the coming quarters. Many investors viewed this comment as an indication that earnings expectations were being guided downward.

"We believe management is just being overly cautious and believe there is some meaningful upside to the current Street consensus," Ader wrote.

The current consensus estimate for fiscal 2002 stands at $3.24 a share, up 15 percent from fiscal 2001. But several estimates range as high as $3.40 a share.

"IGT did not guide estimates lower; it reaffirmed guidance, which we believe included the upper end of the range at $3.40," wrote Harry Curtis of Robertson Stephens. "Like past sell offs, (we) believe investors should welcome the opportunity to buy the stock at lower prices."

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