No Liberation for Gaming Supplier Stocks as Tariffs Take Hold
Gaming stocks were brutally rejected last week as investors processed “Liberation Day”—President Trump’s proposal to impose tariffs on a range of US trading partners. Stocks of suppliers and device manufacturers faced declines, and conditions may deteriorate further for the sector before improving.
A recent report by Stifel analyst Jeffrey Stantial highlights that gaming suppliers are “directly exposed” to worldwide supply chains, which might be impacted by the trade tariffs, mentioning that potential negative free cash flow (FCF) consequences differ among suppliers.
"While the situation remains in flux, our analysis suggests potentially meaningful unmitigated FCF impact from initial reciprocal tariffs for slot manufacturers while also potentially impacting replacement sales via operator uncertainty, consumer pullback and/or geopolitical tensions,” wrote Stantial.
In the gaming device/slot machine sector, the way companies manufacture devices differs by organization, although the majority of machines are assembled and prepared for operation in the US. Nonetheless, these companies remain significantly dependent on certain Asian nations — many of which are targets of tariffs — for obtaining components.
Light & Wonder Might Be Exposed to Tariffs
Shares of Light & Wonder (NASDAQ: LNW) fell 10.45% last week after the slot machine company informed investors about a lawsuit from competitor Aristocrat Leisure; however, some of that decline could be linked to Liberation Day.
In response to the supply disruptions caused by the coronavirus pandemic, Light & Wonder sought to lessen its reliance on Asia for sourcing, with Europe taking on some of that burden, yet this doesn’t shield the company from the recent tariffs imposed by the White House. Furthermore, the firm may be pressured by certain Canadian clients reducing orders because of US trade tariffs imposed on that nation.
“While we have previously noted LNW’s upcoming Investor Day and new long-term financial targets as potentially helping stabilize sentiment, we believe investors are unlikely to show much confidence in projections from any directly or indirectly impacted business in the current environment,” adds Stantial.
On the contrary, the analyst referred to International Game Technology (NYSE: IGT) as a “baby in the bathwater” opportunity due to its divestiture of the slots segment, transforming it into a lottery-centric company.
Gaming Supplier Stock Universe Diminishing, Yet …
In light of the ongoing market crisis, there isn't much positivity, yet the realm of gaming supplier stocks is set to decrease. PlayAGS (NYSE: AGS), which Stantial indicates has strong fundamentals, is being privatized by Brightstar Capital Partners, while IGT’s slot machine division is merging with Everi (NYSE: EVRI) into a firm that will be purchased by Apollo Global Management (NYSE: APO).
The agreement between Apollo and Everi/IGT prevents the buyer from withdrawing because of trade-related problems; however, Stantial pointed out that the private equity firm has a track record of engaging in litigation, making "complete comfort" difficult to achieve.
“Still, we believe the multiple paid for these assets remains reasonable despite share loss since announcement, while reiterating Apollo’s historical interest in owning IGT Gaming & the compelling industrial logic in combining EVRI FinTech with IGT systems,” concludes the analyst. “Hence, we still expect the deal to close as structured, though monitoring closely amidst unprecedented uncertainty.”
