ARLUF Aristocrat Leisure Ltd (PK)

A leader in designing, manufacturing and marketing gaming machines and systems products, International Game Technology (IGT) announced that it has recently settled a long running patent dispute with Sydney, Australia based Aristocrat Leisure Ltd. (ARLUF).

The patent dispute dates back to 2006, when Aristocrat sued IGT in the United States on patents related to multi-level progressives, such as Aristocrat's HYPERLINK and IGT's FORT KNOX products.

Despite repeated attempts, both parties failed to reach an amicable settlement. In November 2010, IGT filed a lawsuit alleging that Aristocrat’s Viridian WS slot machines infringed two of IGT’s patents related to fundamental capabilities for authentication of gaming software. Aristocrat introduced the Viridian WS machines in April 2010, following up on its original Viridian cabinet. Aristocrat countersued IGT in Australia on patents related to a side bet feature on slot machines.

IGT and Aristocrat have agreed to cross license their patents and they will have the right to offer all the products subject to certain royalty obligations. We believe the settlement bodes well for IGT as the cross licensing will help it to penetrate the markets of Australia and Asia-pacific where Aristocrat has strong presence. Moreover, the settlement removes an important overhang from the stock and also reduces legal expenditure.

Recommendation

IGT continues to increase its focus on core slot machine and associated technology businesses, and the Aristocrat settlement will drive its top-line growth going forward, in our view.

The company is also expected to benefit from the strong growth of its interactive, mobile and online business over the long term. IGT is expected to launch more than 400 traditional, online and mobile casino games at the Global Gaming Expo (G2E) from October 4-6, 2011 at the Sands Expo and Convention Center in Las Vegas.

Moreover, IGT also remains focused on reducing dependence on the domestic machine replacement cycle which will boost its profitability going forward.

However, sluggish macroeconomic conditions, a lack of visibility on replacement sales, very few new openings and increasing competition from WMS Industries (WMS) and Bally Technologies Inc. (BYI), will keep the stock range bound in the near term.

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

 
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