Scientific Games Soars on Earnings Beat, Analyst Sees Significant Upside

Posted on: August 9, 2021, 12:12h. 

Last updated on: August 9, 2021, 01:05h.

Todd Shriber @etfgodfather Read More
Expertise: Financial, Gaming Business, Mergers and Acquisitions.

Scientific Games (NASDAQ:SGMS) stock is soaring Monday. That’s after the gaming technology provider delivered second-quarter results that soundly topped Wall Street estimates.

scientific games
Slot machines manufactured by Scientific Games on display above. The company’s second-quarter earnings trounced estimates. (Image: Twitter)

The company earned $1.10 a share on revenue of $880 million, easily beating the Zacks consensus estimate calling for earnings per share of nine cents. That sales figure beat Wall Street forecasts by 14 percent. Adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) of $383 blew past analysts’ estimate of $280 million, buoyed by strength in the company’s gaming operations division and international markets.

Specifically, Gaming Ops meaningfully outpaced expectations, with SGMS’s international yields showing step function growth during the quarter. Slot shipments also appear to be gaining momentum, which has been a key theme this earnings season,” said Stifel analyst Jeffrey Stantial in a note to clients today.

The analyst has a “buy” rating on Scientific Games stock, with an $84 price target. Even when accounting for today’s more than eight percent rally in the stock, that projection implies upside of more than 21 percent from current levels.

Catalysts for Scientific Games Stock

In late June, Scientific Games said it’s planning to divest its lottery management and sports wagering units to raise cash and reduce debt.

The company says it’s “well progressed” on those transactions, though it didn’t further elaborate. When the plans were announced in June, Scientific Games said the divestments of those units could come in several ways. Those include an initial public offering (IPO), a merger with a special purpose acquisition company (SPAC), an outright sale, or a combination with another entity.

Another area where the Las Vegas-based instant lottery provider is likely drawing adulation from investors is leverage reduction. Scientific Games said leverage stood at 7.2x at the end of the June quarter, down dramatically from 10.5x at the start of the year.

“SGMS ended the quarter with ~$8.2 billion of net debt, down -$325 million year-over-year,” said Stifel’s Stantial. “This equates to 7.2x net debt/trailing 12 months adjusted EBITDA, or 6.1x over 2019A adjusted EBITDA. SGMS paid down $150 million on the SGI revolver during Q2, with another $150 million payment subsequent to quarter-end.”

SciPlay Update

Last month, Scientific Games offered to acquire the 19 percent of social casino developer SciPlay Corp. (NASDAQ:SCPL) it doesn’t already own at an 11 percent premium.

The suitor says that offer remains on the table, and it highlighted SciPlay’s second-quarter revenue of $154 million — good for that company’s second-best quarter on record.

Scientific Games said its overall digital sales jumped 27 percent, helped by strength in its iGaming business. That underscores why the company wants to purchase SciPlay and shed its lottery and sports betting units so it can focus more on online opportunities.