The American economy gradually returns to normal as coronavirus case counts dwindle and vaccinations steadily increase. One of the biggest beneficiaries of this will be the travel and tourism industry which had largely been off-line until a couple of months ago.

Already, there is a rapid recovery in TSA’s Travel Tracker which is showing that the number of people passing through TSA checkpoints is now at 67% of 2019 levels. In contrast at the same time last year, it was at 13% of 2019 levels. Another metric showing similar improvement is miles driven. The Bureau of Transportation Statistics shows that miles driven (seasonally adjusted) are now back to pre-coronavirus levels in the US.

Given that many Americans have put off traveling and vacations for more than a year, we are likely to see massive pent-up demand well into 2022. Among the different groups within the travel and tourism sectors, casinos will certainly benefit as they are destinations for gambling, nightlife, concerts, and dining out. However, I’m more intrigued by the lesser-known gambling stocks that make and maintain the various games and machines that populate a casino. These include International Game Technology (IGT), Scientific Games Corp. (SGMS), and Accel Entertainment (ACEL).

International Game Technology (IGT)

IGT is a global manufacturer of gambling games and services. Its two largest product segments are slot machines and lottery games. The company manages many local, state, and national lotteries in North America and Europe. It’s also one of the largest manufacturers and operators of slot machines and counts the largest casino chains among its customers. 

In a sense, the companies building and operating casino games are a more attractive investment option than the casinos, especially at this time. For one, they have more attractive valuations. Second, there is less competition in the industry, while there is healthy competition among casinos which puts pressure on margins.

Casinos have put off maintenance and upgrading their own machines during the pandemic, so stocks like IGT are going to benefit from pent-up demand as well. Additionally, it’s expected that reopening will lead to higher than average volumes of people visiting casinos which on its own will create a greater need for maintenance.

The company’s momentum was evident in its Q1 report which showed a 25% increase in revenue on a year-over-year basis to $1.01 billion. Its operating income came in at  $260 million, a substantial improvement from a $218 million operating loss in the same quarter in 2020. For the full year, analysts are forecasting EPS of $0.81, a 265% increase from 2020, and 92% revenue growth. 

IGT’s POWR Ratings reflect this promising outlook. The company has an overall B rating, which translates to Buy in our proprietary ratings system. B-rated stocks have an average annual performance of 19.7% which compares favorably to the S&P 500’s average annual performance of 7.1%. 

To see IGT’s component grades for Value, Growth, Stability, Sentiment, Quality, Industry, and Momentum, please click here.

Scientific Games Corp. (SGMS)

SGMS makes products and services for casinos and lottery operators. Major revenue sources include slot machines, card shufflers, and managing government-run lotteries. The company is headquartered in Las Vegas and counts many Vegas casinos as customers. 

The company operates through four segments: Gaming, Lottery, SciPlay, and Digital. The company is also looking to bolster its offering of sports gambling products and services with its acquisition of SportCast. This added BetBuilder features, underlying technology, and quantitative trading models to SGMS’  OpenSports product suite. 

The company has certainly benefited from the reopening and increased foot traffic to casinos. The company’s adjusted EBITDA increased 35% to $270 million in Q1. Operating income was $81 million, a major improvement from its $32 million loss a year ago.

For the full year, analysts are expecting SGMS’ EPS to be $1.94, a 687% increase from 2020. Revenue is forecast to grow by 42% to $767 million in Q2. Even though the stock has had impressive gains in 2021, its valuation remains attractive despite its accelerating growth.

SGMS’ constructive outlook is reflected in its POWR Ratings. The stock has an overall B rating, which equates to a Buy in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.

SGMS has a B grade for Growth. This isn’t too surprising given the company’s massive jump in revenue and earnings. Over the last 12 months, the company lost $4.47 in earnings per share but it’s expected to earn $2.16 over the next 12 months. To see more of SGMS’ component grades, please click here. 

Accel Entertainment (ACEL)

ACEL is involved in the operation, installation, and maintenance of video gambling machines, redemption devices, and slot machines for casinos and non-casino locations in states or locales where gambling is legal. As of the start of the year, ACEL operated 12,247 video game terminals across 2,435 locations primarily in Illinois. 

ACEL is also a beneficiary of the economy reopening as 2020 full year EPS came in at a loss of $0.20 per share, while 2021 is expected to be a profit of $0.84 per share. In fact, its last quarter marked a new record in terms of revenue. The company increased locations by 5% and added 14% more video game terminals compared to Q1 of 2020. Further, it had $147 million in revenue, a 37% increase, and a 34% same-store sales growth. This combination of increasing same-store sales and the addition of new locations and terminals is a powerful combination that portends more earnings growth.

On a technical basis, the stock also looks interesting as it is consolidating between $12 and $14 over the past month, while volatility contracts. This circumstance tends to lead to a breakout especially given its underlying trend, improving fundamentals, and bullish price action in its peers.

The POWR Ratings are also positive on the stock as it has a B rating which translates to a Buy. It has an A for Growth which is not surprising given that the company managed to achieve new records despite some lingering challenges from the coronavirus. Its outlook also came in above analysts’ expectations for the rest of 2021. To see more of ACEL’s component grades including Value, Stability, Sentiment, Momentum, Quality, and Industry, please click here.

IGT shares were trading at $25.32 per share on Friday afternoon, down $0.28 (-1.09%). Year-to-date, IGT has gained 49.47%, versus a 13.12% rise in the benchmark S&P 500 index during the same period.

About the Author: Jaimini Desai

Jaimini Desai has been a financial writer and reporter for nearly a decade. His goal is to help readers identify risks and opportunities in the markets. He is the Chief Growth Strategist for StockNews.com and the editor of the POWR Growth and POWR Stocks Under $10 newsletters. Learn more about Jaimini’s background, along with links to his most recent articles. More...

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