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International Game Technology (IGT - Analyst Report) is scheduled to release its fiscal fourth quarter 2012 results after the closing bell on November 8, 2012.

Prior Quarter Highlights

IGT reported a weaker-than-expected third quarter; wherein both top line and bottom line missed the Zacks Consensus Estimates. IGT reported a bottom line of 23 cents a share, which plunged 65.7% year over year due to higher operating expenses and margin contractions in the quarter.

However, revenue increased 9% year over year to $532.8 million, primarily driven by higher North America product sales and interactive businesses.

For the fourth quarter, IGT expects Gaming operations gross margin to be approximately 62%. Product sales gross margin is expected to be 52% for the fourth quarter of 2012.

For further details please read: Higher Costs Spoil IGT's 3Q

Estimate Revision Trend

In the last 30 days, only one upward revision was noticed. However, a downward revision fully offset the positive effect. Hence, the Zacks Consensus Estimate for the quarter remained at 32 cents per share for the same period of time.

Analysts expect IGT’s top line to be positively impacted by higher number of Canadian Video lottery terminal (“VLT”) replacement sales and lower number of shares outstanding to benefit the bottom line. Analysts also expect the Gaming operations revenues to improve slightly. Moreover, analysts expect decent performance from its DoubleDown interactive gaming segment. However, analysts remain cautious about IGT’s declining margins due to the shift to low-yielding units.

Recommendation

We note that IGT has a negative average earnings surprise of 7.06% over the past four quarters. We believe that increasing investment in product development will drive operating costs going forward. This will remain an overhang on the stock in the near term. Moreover, fewer new openings and increased competition from Bally Technologies Inc. (BYI - Snapshot Report) and WMS Industries Inc. will keep the stock range bound in the near term.

However, IGT has an impressive product portfolio. In addition, its cost-cutting initiatives, lesser dependence on the domestic machine replacement cycle and new contract wins are the positives for the company going forward. IGT’s strong growth potential of its interactive gaming segment could act also as a positive catalyst in the long term.

We have a Neutral recommendation on the stock over the long term (6-12 months). Currently, IGT carries a Zacks #3 Rank, which implies a ‘Hold’ rating in the short term.

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