Scientific Games Ratings Outlook Lifted as Moody’s Sees Strong COVID-19 Rebound

Gaming equipment manufacturer Scientific Games (NASDAQ:SGMS) saw its credit rating outlook boosted to “stable” from “negative” by Moody’s Investors Service. The research firm points to a strong post-coronavirus recovery for the slots maker.

Las Vegas-based Scientific Games still carries a B3 credit rating — well into junk territory. The stock gained 10.63 percent last week and is up more than five-fold over the past year.

The change in outlook to stable from negative reflects the recovery in the company’s gaming operations, as the number of gaming facilities open has favorably increased revenue and operating income for the company, following the Q2 2020 closures,” said the ratings agency in a note. “While sequential improvement in 2021 is expected, Moody’s anticipates gaming activity will remain below pre-pandemic levels until at least 2022, with leverage remaining elevated.”

At the height of the COVID-19 pandemic last year, the company slashed $100 million in costs in an effort to firm up its balance sheet. Details on how those reductions were realized are scant, but Scientific Games stock is up 438 percent from its 52-week low.

Good Discipline Paying Off for Sci Games

Scientific Games also provides lottery services to states and wagering platforms to sportsbooks. But the investment community typically looks at the company as a slot machine maker.

“The outlook change also reflects the company’s good cost discipline and more resilient lottery business,” according to Moody’s. These factors, along with a pullback in capex, enabled the company to generate over $280 million of positive free cash flow in 2020, and Moody’s projects a similar free cash flow level can be achieved in 2021 despite an increase in capex.”

Scientific Games’ revenue is mostly derived from play of its slots already on casino floors, sales of new machines, and its lottery business.

Online Casino, Sports Betting Opportunity

While Scientific Games isn’t a consumer-facing operator, it does have leverage to the burgeoning and iGaming and sports wagering markets.

“The company is also well-positioned to benefit from the growth of digital gaming products and sports betting, as these markets continue to expand and mature,” notes Moody’s. “SGI owns a large portfolio of complementary gaming products and services, both digital and non-digital, that it can utilize and cross-sell globally among its various distribution platforms.”

For investors, that’s relevant because Goldman Sachs forecasts US sports betting and online casinos will boom to $39 billion and $14 billion industries by 2033 from $900 million and $1.5 billion, respectively, today.