Value Investing Conference New York

1. A Bargain Hiding in
Plain Sight

2. Sellers Capital
Investment Criteria
1. Moat
2. Management
3. Balance Sheet
4. Margin of Safety
Goal: Avoid permanent capital impairment (risk).
Hit singles and doubles. Look for 90%
probability stock will be at a higher price within
3 years.

3. Today’s Presentation
• Premise: Bargains are “hiding in plain
sight” in the large-cap area.
• Mutual fund investors pulling money out of
this area. Contrary indicator.
• High-quality (wide-moat) large caps are the
best bet.
• Examples of undervalued large-cap
wide-moat stocks.

4. Domestic Mutual Funds – October 31, 2005
Style YTD % 1-Year % 3-Year % 5-Year %
Small Value -0.6 10.81 23.63 18.35
0
Medium Value 5.04 15.9 22.72 14.15
Small Core -0.47 10.52 22.66 13.3
Medium Core 1.12 13.26 20.01 11.42
Large Value 3.55 11.53 14.82 4.89
Large Core -0.55 8.07 11.73 -1.36
Small Growth -1.57 9.74 21.04 -3.52
Medium Growth 7.23 19.51 20.48 -4.7
Large Growth -1.26 4.58 7.43 -13.66
Source: Morningstar

5. Mutual Fund Flows – Predictive?
• Large cap growth has significantly underperformed other styles for
the YTD and past 1, 3, 5 yrs.
• Research Firm Dalbar’s 2004 study -- The average investor earned
3.51% annually vs. 13% for the market over the past 20 years
– Typical investor purchased funds that had already been going up
significantly and sold funds that had gone down.
– Buy high / sell low.
• Evergreen Capital Management – 2005 study – Over past 23 years,
outflows for a particular fund category are very rare and clearly
indicative of extreme investor pessimism.
– “To actually force a mutual fund style into a redemption mode over an
extended time frame requires an intense level of negativity by a large
segment of the mutual fund population.”
– “a very clear inverse relationship between extreme inflows or outflows,
and subsequent returns.”

6. Evergreen Capital Management – Study on Fund Flows
Average 2-yr. Average # of Obs.
Style Event Excess Return Accuracy (By Quarter)
Large Cap
Growth Outflows/Low Valuations 4.20% 100% 9
Large Cap
Value Outflows/Low Valuations 6.50% 95% 19
Mid Cap
Growth Outflows/Low Valuations 10.30% 92% 12
Mid Cap
Value Outflows/Low Valuations 14.50% 91% 11
Small cap
Growth Outflows/Low Valuations 1.70% 43% 7
Small Cap
Value Outflows/Low Valuations 17.80% 100% 18
All Styles Outflows/Low Valuations 8.70% 91% 76
Source: Evergreen Capital Management

7. U.S. Equity Mutual Fund Net Flows ($B)
300
275
250
225
200
175
150
125
100
75
50
25
0
-25 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004
-50
Growth Value
2005 Annualized
Source: ICI, Sellers Capital

8. International Mutual Fund Net Flows ($B)
100
75
50
25
0
1985 1990 1995 2000 2005
-25
International
2005 Annualized
Source: ICI, Sellers Capital

9. Domestic Mutual Fund Net Flow
All Equity Sizes
100
80
60
40
20
0
-20
Large Mid-Cap Small Total
2004 Aug YTD 2005
Source: Morningstar *2005 YTD Numbers are Annualized

10. Large Cap Funds - Money Flow
50
40
30
20
10
0
-10
-20
Growth Blend Value Total
2004 Aug YTD 2005
Source: Morningstar *2005 YTD annualized

11. Wide-Moat Large Caps are Cheap
• Ed Yardeni: “Large Caps look cheap with a P/E of 14.0 being a 3-
year low.”
• Grantham, Mayo, Otterloo (GMO) : “High quality large caps
should outperform low-quality large caps by 10.6% per year, on
average, over next 7 years.”
• Wall St. Journal: “Investors might have a rare opportunity to
scoop up shares of sleeping giants that are cheaper than they've
been in years.”
• Bill Miller: “The old leadership in the market -- oils, utilities,
REITs, commodity related names, and housing -- have all
corrected….This often suggests a change to new leadership. New
leadership usually consists of those areas that are cheap, have
performed poorly, and where expectations are low. The leading
candidate that meets those criteria is the mega cap S&P 500
names, the group that peaked in early 2000 and that has trailed
the mid and small caps ever since.”

12. GMO 7-Year Global Equity Forecasts1
Value and growth within large and small stocks as of August 31, 2005
7% U.S. Large U.S. Small Int’l. Large2 Int’l. Small2
6%
5%
4.8%
4.4% 4.4%
4.2% 4.2%
4%
3.9% 3.7%
2.5%
Annual Real Return Over 7 Years
3% 2.5% 2.5%
2.5%
2.5% 2.5%
2%
1.9%
1.2%
1% 0.7% 0.7% 1.9% 2.3%
2.1% 0.4% 0.4% 1.7% 1.4% 1.7%
2.0% 2.1% 2.0% 2.0%
0%
-0.9% -1.3%
-1.6% -1.4% -1.6%
-1%
-2%
-3%
-4%
-5%
2.0%
-6%
-6.2%
-7%
S&P 500 US Large US Large US High US Low US Small US Small US Small EAFE Intl Intl Intl Intl Small Intl Small
Growth Value Quality Quality Growth Value Growth Value Small Growth Value
1 Real returns — long-term inflation assumption: 2.5%
2 Return forecasts for international equities are ex-Japan.
Note: These forecasts are forward-looking statements based upon the reasonable beliefs of GMO.

13. Other Evidence of
Large-Cap Outperformance
• Barron’s – U.S. public corporations have more
than $2 trillion cash on balance sheets.
– Announcing massive buybacks (Time Warner $12.5B;
Microsoft $19B, Intel $25B).
– IPO market not bad, but NET stock issuance negative.
– Less supply of stock. Supply/demand imbalance.
• Morningstar conclusion (10/31/05): A
disproportionate share of cheap stocks belong to
high-quality companies.
• Robert Stansky leaves Fidelity after outflows.

14. Wide-Moat Stocks with
Attractive Valuations
• Home Depot • UPS
• Wal-Mart • Berkshire Hathaway
• McDonald’s • Stryker
• Coke • Avon Products
• Microsoft • Washington Post
• Pfizer • International Game
Technology

15. Summary
• Mutual fund inflows/outflows are inversely
predictive of future returns.
• Domestic large-cap mutual funds, particularly
blend and growth, have seen outflows recently.
• U.S. large-cap blend and growth stocks have
performed poorly, now are very cheap.
• High quality large-cap growth stocks are a good
bet over the next few years.

16. A Bargain Hiding in
Plain Sight

17. Case Study
International Game Technology
Ticker: IGT
NYSE
All fundamental data as of 09/30/05
$9.4 billion slot machine and gaming operations company

18. IGT
“No other form of gambling manipulates the human
mind as beautifully as these machines. I think that’s
why (they) are the most popular form of
gambling….”
Dr. Nancy Petry,
Professor of Psychiatry, University of Connecticut School of Medicine
$1 billion daily placed in slots ($365 billion yearly)
• $30 billion in Slot Revenues Annually
• $7 out of every $10 of gambling revenues
Sources: Fortune Magazine and New York Times

19. IGT – Price Graph Since IPO

20. Economic Moat
• Industry Characteristics
– 3 largest industry players = 90% market share.
• IGT is the largest, with 70% market share.
– Significant Pricing Power.
• Competitors don’t compete on price.
• Casino payback less than 60 days for an average $15,000 machine.
– Recurring revenue – about 50% of revenue is recurring, IGT shares a
portion of the slot take with the casino.
– Barriers to entry – patents, unique legal challenges in each
jurisdiction, high R&D spending required, extensive intellectual
property portfolio.
• IGT spends about as much on R&D as next 3 competitors
combined.
– 4 to 6 year replacement cycle based on new technology/IP. Fairly
predictable cycle.
• Server-based games coming next.

21. US Market Share 2004
Other
Alliance
WMS
Aristocrat
IGT
Source: Bear Stearns

22. Historical Profitability
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
Op. Margin 26.9% 27.3% 30.4% 32.0% 29.7% 32.1% 26.3% 35.0% 37.6% 38.8% 28.6%
Net Margin 14.9% 16.1% 18.4% 18.5% 14.6% 13.8% 17.8% 15.7% 17.6% 20.1% 18.3%
LT Debt 107.5 107.2 140.7 322.5 990.4 991.5 987.7 971.4 1146.8 791.8 200.0
Shr. Equity 554.1 623.2 519.8 541.3 242.2 96.6 296.1 1433.1 1687.5 1976.6 1,906
ROC 15.4% 17.7% 22.7% 19.8% 13.4% 16.9% 19.7% 13.7% 14.8% 19.3% 18.9%
ROE 16.7% 18.9% 26.4% 28.2% NMF NMF NMF 20.2% 22.2% 25.3% 22.9%
Source: Value Line, Sellers Capital

23. Moat (cont’d)
• Average ROE 1995-2005: 22.6% (excludes 3
years of negative capital and infinite ROE).
• Average ROC 17%.
Conclusion:
This is a Wide Moat Company.
ROC significantly above Cost of Capital,
and is expected to stay that way.

24. Management & Corporate Governance
• Corporate governance: good, not perfect
– Insiders own 1.5% of stock.
– CEO has been there for 3 years – but part of
gaming operations acquired since 1986.
– Clean accounting.
– Executive pay – not outrageous.
– The best people in the industry at almost every
position.
– Increases buybacks when share price low, not high
(bought back 20% of shares in 1999 at low price).
– Issues a lot of stock options (negative).
Conclusion: Pretty good (but not perfect) governance. Gets a B grade.

25. Cumulative Share Repurchase History
300
*As of November 11, 2005 261 271
257
249
234
250
224
200
Millions of Shares
162
150
100
74
52
50
0
1997 1998 1999 2000 2001 2002 2003 2004 2005
Total
$M $225 $122 $361 $318 $101 $214 $161 $130 $355 $1,987
Avg Cost $4.32 $5.51 $4.15 $5.09 $9.95 $14.70 $19.13 $31.81 $27.71 $7.27
Source: IGT and Sellers Capital

26. Balance Sheet
• Operating earnings are more than 37 times
larger than net interest expenses.
– Free cash flow normally greater than net
income.
– Debt is equal to just 12% of equity and 6% of
total assets.
Conclusion: Rock solid financial health.

27. Margin of Safety
• Valuation -
– Conservative DCF model estimates fair value $38-42.
– Stock price is ~$28. Margin of Safety: 30%.
– Forward P/E multiple: 21 at trough of cycle.
– P/E of 15 based on average of $1.80 EPS next cycle
(does not include effect of stock buybacks).
– Analysts have history of underestimating earnings
during peak of cycle (i.e. 2000, 2001).
• Avg machine price has grown 80% since trough of last cycle.

28. Historical Growth
1 YR 3 YR 5 YR 10 YR
Revenues -4% 9% 19% 14%
Operating Income -18% 1% 16% 15%
EPS -9% 13% 22% 21%
Source: Value Line, IGT 10-Q

29. Growth Prospects
• Int’l growth 30%/yr. – Macau/China, other Asia, Italy,
UK, Russia.
• Non-machine revenue (casino mgt. software, IP, parts)
growing 30%/yr.
– Gross margins >65%!
• Growth in # of U.S. and worldwide gambling jurisdictions
as govts. seek to raise revenue.
• Stock buybacks provide springboard for jump in EPS when
cycle turns.
• Price increases 3-5%/yr. + 5-6% unit growth = huge
margin expansion in next upgrade cycle (late 2007) on
fewer shares outstanding.

30. Ownership
• Private Capital Mgmt. owns approx. 10%.
• Ruane, Cuniff: Largest new purchase in Q1
2005. Bought more shares in Q2.
• Insider buy: 2.4 million shares @ $27
recently by member of B.O.D.
• Management: Owns about 1.5% of
company.

31. Why is the Stock Cheap?
• Normal herd behavior – Most investors are selling
as an industry cycle bottoms out, just as they are
buying when the cycle is peaking.
• Recency – ttm growth negative.
• Timing of next product cycle has been pushed out
from mid-2006 to late 2007 – timing is uncertain.
• Analysts not positive yet, still waiting.
– In 2005, IGT has been downgraded 9 times, upgraded
only once. (from “sell” to “neutral”).
• Typical analyst comment: “No near-term catalyst.”

32. Historical High/Low Prices
1989 1990 1991 1992 1993 1994 1995 1996 1997
High 0.5 0.63 3.00 6.6 10.35 8.5 4.25 5.88 6.73
Low 0.3 0.28 0.45 2.73 5.95 3.73 2.7 2.7 3.83
1998 1999 2000 2001 2002 2003 2004 2005
High 7.18 6.08 12.35 17.98 20.03 37.00 47.13 34.6
Low 4.03 3.53 4.35 8.925 11.9 18.05 28.23 24.2
Source: Value Line

33. IGT – EPS Growth vs. Change in Stock Price
EPS Growth
IGT - EPS Growth vs. Stock Price
Return
150%
130%
110%
90%
Return/Growth
70%
50%
30%
10%
-10%
89
90
91
92
93
94
95
96
97
98
99
00
01
02
03
04
05
19
19
19
19
19
19
19
19
19
19
19
20
20
20
20
20
20
-30%
-50%
Year

34. IGT – What Happens When Cycle Bottoms?
Year 1994 1995 1996
Stock Price -46% -30% 72%
EPS Growth 31% -32% 30%
1998 1999 2000
Stock Price -3% -16% 136%
EPS Growth 19% 2% 31%
2004 2005 2006
Stock Price -2% -18% ?
EPS Growth 26% -11% ?

35. Investment Conclusion
• Wide moat.
• Excellent long-term growth prospects.
• Healthy industry structure, competitors don’t compete on price.
• Great balance sheet.
• Insiders, renowned investors buying.
• Good management team.
• Significant margin of safety in valuation.
• Analysts are pessimistic.
• No short-term “catalyst.”
Conclusion:
Very low probability of permanent capital impairment.
Risk/reward ratio good.
The stock is a “buy.”