Is Scientific Games Ready To Soar?
January 14th, 2011 by Anatolii FesiukBy Anatolii Fesiuk
Consulting Equity Analyst
Super Stock Screener
In the first part of December insiders bought SGMS’s shares for $40,044,688. Average daily dollars traded is near $10M, insiders were buying on the 3rd, 6th, 8th and 10th of December and bought more than average trading volume in those 4 days. I want to find out what makes this stock so valuable and is it time for us to join insiders and buy?
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Company Description
Scientific Games Corporation supplies technology-based products, systems, and services to gaming markets worldwide. The company operates in three segments: Printed Products Group, Lottery Systems Group, and Diversified Gaming Group
Recent Changes
On November 29th the company made changes to upper management, notably adding personnel to focus on the Asia-Pacific Region, which will help them earn more revenue in fast growing markets.
The new management team set several goals for their future:
- Continue to execute on a strategy to become the preeminent supplier of server-based gaming machines in wide area gaming markets.
- Further develop the international instant ticket market.
- Increase product sales by tailoring the company’s products.
- Aggressively target attractive new business models, including lottery private management.
- Leverage the company’s leading global distribution platform by developing and delivering new content.
- Expand utilization of the internet and other interactive technologies.
Company Valuation
The graph below illustrates the firm’s rapid growth that actually began as the tech bubble unwound and only paused during the 2008-09 recession.
The firm’s free cash flow was negative until 2009. Prior to 2009, operating cash flow grew each year, yet capex climbed as well. Steady increases in operating cash flow, coupled with a large drop in capex in 2009 allowed the firm to post its first positive free cash flow. Moreover, looking at the available data for 2010, this trend is persisting. Assuming they post a similar free cash flow for this year, it implies free cash flow will roughly be $1,14 per share. The current stock price is near $10, implying that P/FCF ratio equals 8,7. This is quite low.
SGMS Historical Free Cash Flow (in millions)
2006 2007 2008 2009
Operating Cash Flow $131 $192 $208 $220
Capital Expenditures 191 222 229 111
Free Cash Flow (60.5) (29.9) (21.4) 108
Risks
The firm operates in a competitive market implying competition represents a key risk.
More than 2/3 of company’s financial resources are borrowed. I think everybody still remembers crisis times and the kind of problems debt can bring. This represents one of the reasons the firm is working on lowering its debt
Conclusion
SGMS offers an interesting opportunity to investors. Insiders are buying stock very actively. It is delivering solid free cash flow, book value is growing over the long-term. If SGMS can get a handle on its debt situation it could become a market darling.
I recommend keeping an eye on SGMS. It reports earnings on February 28th. If management signals it intends on lowering its debt more aggressively, share prices could jump.
SGMS is also currently ranked as a “Hold” by Super Stock Screener’s Ranking System.
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We recommended SGMS when it traded on $9.33 level. Friday close price was $10.27. So since recommendation stock moved up 10.08% (S&P grew 8.30%). Apparently this stock showed good absolute return and good relative return. But on 10 May they reported bad quarter results and general market is week recently, so I recommend to close your positions on this stock.