International Game Technology PLC (NYSE:IGT) shares are up more than 3.70% this year and recently increased 0.59% or $0.16 to settle at $27.49. Dover Downs Gaming & Entertainment, Inc. (NYSE:DDE), on the other hand, is up 5.88% year to date as of 01/16/2018. It currently trades at $1.08 and has returned 5.97% during the past week.
International Game Technology PLC (NYSE:IGT) and Dover Downs Gaming & Entertainment, Inc. (NYSE:DDE) are the two most active stocks in the Gaming Activities industry based on today’s trading volumes. The market is clearly enthusiastic about both these stocks, but which is the better investment? To answer this, we will compare the two companies based on the strength of their growth, profitability, risk, returns, valuation, analyst recommendations, and insider trends.
The ability to consistently grow earnings at a high compound rate is a defining characteristic of the best companies for long-term investment. Analysts expect IGT to grow earnings at a -14.68% annual rate over the next 5 years.
Profitability and Returns
Growth isn’t very attractive to investors if companies are sacrificing profitability and shareholder returns to achieve that growth. We will use EBITDA margin and Return on Investment (ROI), which control for differences in capital structure between the two companies, to measure profitability and return., compared to an EBITDA margin of 5.16% for Dover Downs Gaming & Entertainment, Inc. (DDE). IGT’s ROI is 5.50% while DDE has a ROI of 1.20%. The interpretation is that IGT’s business generates a higher return on investment than DDE’s.
The amount of free cash flow available to investors is ultimately what determines the value of a stock. IGT’s free cash flow (“FCF”) per share for the trailing twelve months was -0.81. Comparatively, DDE’s free cash flow per share was +0.05. On a percent-of-sales basis, IGT’s free cash flow was -3.18% while DDE converted 0% of its revenues into cash flow. This means that, for a given level of sales, DDE is able to generate more free cash flow for investors.
Liquidity and Financial Risk
Liquidity and leverage ratios measure a company’s ability to meet short-term obligations and longer-term debts. IGT has a current ratio of 0.80 compared to 0.60 for DDE. This means that IGT can more easily cover its most immediate liabilities over the next twelve months. IGT’s debt-to-equity ratio is 2.89 versus a D/E of 0.19 for DDE. IGT is therefore the more solvent of the two companies, and has lower financial risk.
IGT trades at a forward P/E of 19.32, a P/B of 2.11, and a P/S of 1.10, compared to a P/B of 0.30, and a P/S of 0.20 for DDE. IGT is the expensive of the two stocks on an earnings, book value and sales basis. Given that earnings are what matter most to investors, analysts tend to place a greater weight on the P/E.
Analyst Price Targets and Opinions
A cheap stock is not necessarily a value stock. Most of the time, a stock is cheap for good reason. A stock only has value if the current price is substantially below the price at which it should trade in the future. IGT is currently priced at a -13.01% to its one-year price target of 31.60. Comparatively, DDE is 8% relative to its price target of 1.00. This suggests that IGT is the better investment over the next year.
Insider Activity and Investor Sentiment
Analysts often look at short interest, or the percentage of a company’s float currently being shorted by investors, to aid in their outlook for a particular stock. IGT has a short ratio of 1.86 compared to a short interest of 0.19 for DDE. This implies that the market is currently less bearish on the outlook for DDE.
Dover Downs Gaming & Entertainment, Inc. (NYSE:DDE) beats International Game Technology PLC (NYSE:IGT) on a total of 10 of the 14 factors compared between the two stocks. DDE is more profitable, has higher cash flow per share, has a higher cash conversion rate and has lower financial risk. In terms of valuation, DDE is the cheaper of the two stocks on an earnings, book value and sales basis, Finally, DDE has better sentiment signals based on short interest.