Scientific Games Working to Reduce Debt, But “Seeing is Believing,” Says Analyst

Posted on: August 3, 2019, 04:30h. 

Last updated on: August 3, 2019, 12:33h.

Scientific Games Corp. (NASDAQ: SGMS), the maker of slot machines, video lottery terminals (VLTs) and other gaming equipment, reduced its debt burden by $155 million in the second quarter. But the company still carries about $8.65 billion in liabilities, prompting one analyst to take a wait-and-see approach to the firm’s deleveraging efforts.

Slot machines made by Scientific Games, a company trying to reduce its debt. (Image: Twitter)

Much of the company’s June quarter debt reduction effort was attributable to the May initial public offering (IPO) of SciPlay Corp. (NASDAQ:SCPL). Spinning off the maker of mobile and online casino games is helping Scientific Games reduce its leverage, but that effort would be more efficient if the online game maker’s stock was performing better. Shares of SciPlay have shed 30.56 percent of their value since the IPO.

Looking ahead, mainly at 2020, SGMS announced an ambitious target of achieving 5.5x leverage by the end of 2020,” said Macquarie analyst Chad Beynon in a note provided to “With Net Debt at $8.65bn, we believe SG can get net debt down~$525-550m in the next 6 quarters(5.7x by YE 2020).”

When Scientific Games reported second-quarter results on Aug. 1, it said it had $38 million in free cash flow (FCF), far below Beynon’s estimate of $60 million and Wall Street’s consensus forecast of $70 million.

Share Performance: Closer Examination Required

Scientific Games stock is up almost 15 percent year-to-date, which, on the surface, looks good. That’s about 100 basis points better than the Russell 2000 Index, a widely followed basket of smaller companies, a relevant comparison because SG has a market value of $1.82 billion, making it a small-cap company.

However, the bulk of the appreciation in SG shares occurred between early January and late February. After flirting with $30 late in the second month of the year, the stock has since plunged nearly 32 percent. The Russell 2000 is lower by just 4.8 percent over the same period.

Year-to-date, the maker of electronic table systems and products used to manage sportsbooks has reduced its debt by $300 million. But its liabilities are more than quadruple its market value, making SG’s goal of paring a leverage ratio at 6.5x currently to 5.5x by the end of next year seem ambitious.

Beynon, the Macquarie analyst, said the company has the biggest leverage ratio in the universe of gaming and leisure companies that he covers.

Betting On Sports Bettors

SG stock surged in May 2018 immediately after the US Supreme Court overturned the Professional and Amateur Sports Protection Act (PASPA), as Wall Street wagered the company would be a winner as sports betting proliferated beyond Nevada. However, investors quickly lost enthusiasm for the stock upon realizing roll outs would be slow and that Scientific Games has competition in the space.

Beynon argues that waning fervor has morphed into under-appreciation and that market participants may not be accurately accounting for SG’s sports betting market share.

“At this point, SG gets almost no credit for the platform and partnerships,but we believe they will when theNFL season begins or more states launch,” said the analyst.

Beynon has a “neutral” and $24 price forecast on Scientific Games, implying upside of 16.7 percent from Friday’s close.