Late Tuesday, gaming device manufacturer Light &Wonder (NASDAQ: LNW) delivered solid fourth-quarter results. But some analysts believe most of the good news is already factored into the shares.
With the stock up 17.4% year-to-date and 57.5% over the past 12 months, it’s not a stretch for analysts to say Light & Wonder has priced in ample positivity and that the stock may be richly valued. In a new report to clients, Stifel analyst Jeffrey Stantial reiterated a “hold” rating on the name while booting his price target to $97. But that’s just pennies above where the shares trade at this writing.
Forward commentary was mixed, with management citing 1) accelerating game ops installs growth & improving mix, 2) favorable outlook for North America & Australia ship share, 3) uplift from slot adjacencies, and 4) continued robust SciPlay growth, but also 1) re-accelerating SciPlay spend, 2) live dealer ramp costs, and 3) higher corporate costs,” wrote the analyst.
He added that the 45% free cash flow conversion target, which had long been a catalyst for the shares, could take some time to be realized.
Light & Wonder Helped by International
Light & Wonder’s fourth-quarter earnings before interest, taxes, depreciation, and amortization (EBITDA) beat was assisted by strength in the company’s international slots division.
“International slot sales primarily drove the segment beat, with LNW shipping 7,340 units vs. Consensus of 3,867. Management highlighted a meaningful ~3,700 unit shipment in the U.K. driving upside, with international shipments excluding that sale ~200 units below Consensus,” added Stantial.
The gaming device maker likely topped 20% ship share in Australia due to the newly launched Dragon family of slots. That’s an impressive feat when considering Australia-based Aristocrat controls half of the slot machine market in that country.
Light & Wonder could see additional growth in international slot shipments. That’s as Macau continues recovering from coronavirus closures and as regulators in the Philippines liberalize the gaming device market at that country’s casinos.
Light & Wonder Not a ‘Wide Moat’ Name
While Light & Wonder has the resources to allocate to research and development and high-growth opportunities, such as iGaming, via its SciPlay unit, some analysts believe the company still lacks an economic moat.
Firms with the “wide moat” designation are those that enjoy significant competitive advantages over rivals. While Light & Wonder is one of the largest slot machine makers in the world, it still lags behind Aristocrat in terms of global installs.
“We do not think Light & Wonder has carved an economic moat,” observed Morningstar analyst Angus Hewitt. “While hit games can come down to chance, we do not believe Light & Wonder has garnered the appropriate intellectual property or brand assets to enjoy excess economic returns over the long run, particularly given stiff competition from market leader Aristocrat.”
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