Jefferies Equity Research analyst David Katz found additional evidence for his bull-market case on gamemaker Light & Wonder. In a Sept. 8 investor note, he summarized the findings from meetings with Light & Wonder management.
Katz discerned double-digit cash-flow growth, “increasingly comfortable in the near term and setting up more likely longer term, as well as earnings momentum builds.” He added that the company’s stock valuation at 9.1 times cash flow is steep compared to its peers, but justified by revenue growth and less relevant in a market of haves and have-nots.
He cited the well-received rollout and ensuing momentum of the Dragon Train slot machine over the last three to six months. Light & Wonder executives were of the opinion that this would continue, with tailwinds in the form of Australian and international versions, and a “strong” studio ramp in the United States. Additional momentum would be generated by Dracula-themed and Huff and Puff games, along with other new products.
Management said that additional Light & Wonder units are building business that will benefit and support the land-based custom. This, in turn, is delivering benefits to the digital- and social-gaming sectors of the company.
Management said execution is improving in social gaming, despite monthly average users being down 6.9 percent. Average revenue per user, by contrast, is up 11.8 percent.
“Igaming, and notably live dealer [games], continue to progress more gradually, given the regulatory landscape and the complexity and capital intensity of live dealer,” Katz wrote. Still, managerial optimism was expressed for ongoing growth in the digital sphere.
Light & Wonder’s brain trust was also reported to be upbeat on gaining even more traction in the gaming-systems business. Given recent upgrades by customers, momentum here is regarded as a longer-term proposition.
“For the time being, [management] expects that cash conversion should be solid, albeit lower than peers, given the acceleration in recurring-revenue game placements and new launches,” Katz said. He stood firm on his free-cash-flow projection of 31 percent, comparable to last year. He projected an acceleration to 38 percent in 2025, which he said is in line with Wall Street’s consensus.
Light & Wonder is still on the lookout for tuck-in acquisitions, mainly to benefit digital gaming. As for stock buybacks, company brass “expects to be a meaningful repurchaser programatically, with some variations quarter to quarter based on a range of factors.”
Katz stuck with his $116-per-share price target on LNW stock. At the time of his report, it was trading at $105 per share.
