Sega Sammy Holdings: How Sonic, Alien And Casinos Will Boost This $5 Stock

Jul.31.14 | About: Sega Sammy (SGAMY)

Summary

Strong video game lineup with Alien Isolation and Sonic Boom.

Top line sales expected to increase 19% with consumer segment leading the way.

Japan casino legislation a short- and long-term catalyst with Sega a major winner several possible ways.

Shares trading down over 20% in 2014 offer substantial upside at this price.

Most Americans are probably familiar with the name Sega as the creator of the hit video game franchise Sonic the Hedgehog. After several mergers, Sega is now part of Sega Sammy Holdings, a large Japanese company that trades in Japan and on the OTC market (OTCPK:SGAMY). Many would be surprised to learn that the company is a leader in slot and amusement park games and relies less on its packaged games. Sega's consumer goods segment is making a comeback though with upcoming Sonic and Alien games. These games, along with strong digital free to play games, offer nice upside in Sega Sammy Holdings.

Video Games

One of the most exciting games ever in Sega's lineup is "Alien Isolation." The game, which is modeled after the hit movie franchise, is set to be released on October 7th for Playstation 4, Playstation 3, XBOX One, XOBX 360 and PC.

The game (video trailer here) has had tremendous reviews and reception and was a staple at this year's E3 and San Diego Comic Con. Over the weekend, Sega demoed the game to Comic Con attendees, allowing them to sit inside a unique alien egg enclosed gaming chair. This one of a kind experience was reviewed here.

The storyline of the Alien game has gamers playing as Amanda Ripley, daughter of Ellen Ripley (Sigourney Weaver in the Alien movies). Gamers have to try and travel through the ship quietly to avoid the lone xenomorph onboard. To intensify the game, Alien Isolation will also be compatible with Oculus Rift, allowing gamers an up close and personal experience with the Alien.

Alien Isolation also features the original voices from the movie series. Stars Sigourney Weaver, Tom Skerritt, Veronica Cartwright, Harry Dean Stanton and Yaphet Kotto are reprising their roles as voices in the game. Certain levels and unlockable content will feature gamers playing as the original cast and seeing events from the movie.

Sega's more known franchise of Sonic the Hedgehog is getting a facelift in 2014. The company is launching a new video game series, toy line and television show. Sonic Boom will be the name of all three properties, which will follow the same storyline. The plot will center around Sonic, Tails, Knuckles and Amy Rose.

Sonic Boom will be released as a game for the Nintendo Wii and 3DS. This continues the Sonic exclusive partnership with Nintendo (OTCPK:NTDOY). The prior two games that were exclusive to Nintendo were "Sonic: Lost World" and "Mario & Sonic at the Sochi 2014 Winter Games." The WiiU game will be released on November 18th in the United States and November 21st in Europe. The 3DS version will be released on November 11th in the United States and November 14th in Europe.

The television show will air on the Cartoon Network later in 2014. There will be 52 11-minute episodes shot, with the episodes likely appearing as two packs on Cartoon Network. The show will air in the United States and France, with other countries possibly being added prior to the launch. A new line of toys is coming from partner Tomy. Toys will include plush, action figures, remote control, role play, vehicles and novelty.

Sonic remains a strong franchise, which has generated more than 70 video game titles. Together, the games have generated more than $5 billion in sales. More than 140 million Sonic related games have been sold worldwide.

Digital Games

One area where Sega wasn't huge but has had recent success is digital gaming. A free to play game called Chain Chronicles has taken parts of the world by storm and grossed $72 million in its first nine months.

In April, Sega ranked fourth on Google Play and first for iOS as the company with the most games in the top 50 for sales. A quick look at App Annie shows Sega's digital games are still popular overseas. Take a look at these figures:

· Sonic Dash is the #100 free iOS in United States

· In Japan, Sega had the 8, 13, 59 and 67 spots for highest grossing game (iOS). Number eight was Chain Chronicle and number thirteen was Puyo Puyo Quest

· Chain Chronicle was the No. 37 free game in Japan for iOS

· Sega had the 8, 24, and 61 spots for highest grossing game for Play Store Japan

· Sega had the 25, and 84 for free games in Japan (Play Store)

Here are the figures given from the recent year end presentation on digital games:

· Chain Chronicle making 0.9 to 1.0 billion yen monthly

· Puyo Puyo making more than 500 million yen monthly

· 5 other games making more than 100 million yen monthly

· 6 other games making more than 50 million yen monthly

· Together, Sega has 13 games all making more than 50 million yen monthly

To increase its gaming presence in parts of the world, Sega partnered with Gumi to take mobile titles outside of Japan. As part of the partnership, Sega also invested in Gumi. Games like Chain Chronicle will launch later this year in Europe, North America and Southern Asia. Gumi also is rumored to be exploring an IPO by the end of the year, which could increase the value of Sega's holdings in Gumi equity.

The pipeline looks strong for Sega, which will introduce around 15 new games during fiscal 2015. Here is a look at what has been announced in the pipeline:

· Quarter 2: New RPG from Chain Chronicle creating team

· Quarter 2: Bring Chain Chronicle to handheld

· Quarter 3: New cooperative 3D MO-ARPG

· Quarter 3: Major IP Title

· Quarter 3: First ever full native title from F4 Samurai

The expansion to other countries with existing games and properties will continue to be a theme as well. Europe and the United States will see Dragon Coins, Super Monkey Ball Bounce, Crazy Taxi and Chain Chronicle. China will soon have the Puyo game. Chain Chronicle will continue its expansion by hitting Southeast Asia in the third quarter.

Casinos in Japan a Catalyst Not Priced In

Japan remains one of the only developed countries to not have casinos. The country does have some forms of gambling, with Pachinko machines representing a huge revenue source for Sega Sammy. Casinos may be coming to Japan by the year 2020 and that could be a huge benefit for Sega and its shareholders.

Sega has plans to open a large resort complex on the land adjacent to Incheon International Airport in South Korea. The construction is set to begin in 2016, with an opening scheduled for 2017. This is a prime piece of property in South Korea considering Incheon remains one of the ten busiest airports in the world. The operation and ownership of this casino could help Sega secure a casino license in Japan and create a huge casino business that could become one of the best performing and most profitable segments for Sega Sammy Holdings.

Sega also is increasing its presence in the resort market with its 2012 acquisition of the Phoenix Resort. The Phoenix Segaia Resort in Japan has hotels, spas, golf courses and restaurants. A new joint venture with Paradise Group is attempting to secure a casino license in Japan.

A new law is coming next session that will legalize casinos. This has been a multi-year process, but the belief is this is to get done in time to get casinos in Japan prior to the 2020 Summer Olympics in Tokyo.

With the talk of casinos, and also the Olympics in Japan, Sega will come out a winner in the resort space whether it gets its own casino or not. Sega is a leader in slot machine style games and with an existing infrastructure and presence in Japan should be counted on to supply some casinos with games.

The casino portion of Sega Sammy Holdings is an interesting one as it is currently represented as the Other business segment, which is the lowest revenue driver. New legislation in Japan could still send shares of Sega Sammy higher as investors will recognize the potential from Sega as a supplier and possible operator.

Financials (Figures in billion Yen)

On May 29th, Sega Sammy Holdings gave a presentation of its last fiscal year. Over the last six months, total sales more than doubled. Here is a look at the quarterly breakdown of revenue:

· Quarter 1: 2.1 ($20.6 million)

· Quarter 2: 4.3 ($41.2 million)

· Quarter 3: 6.7 ($65.7 million)

· Quarter 4: 7.8 ($76.5 million)

These are quite the impressive figures considering the prior year had revenue marks of 1.5 and 1.6 in the last two respective quarters.

Here is a look at the full-year sales by segment:

Total Sales

378.0 billion yen ($3.7 billion)

+18%

Pachislot and Pachinko Machine

181.8 billion ($1.8 billion)

+28%

Amusement Machine Sales

38.6 billion ($0.4 billion)

-1%

Amusement Center Operations

43.2 billion ($0.4 billion)

+1%

Consumer Business

99.8 billion ($1.0 billion)

+19%

Other

14.5 billion ($0.1 billion)

+8%

Click to enlarge

As this article centers around the consumer business, which includes video games and digital games, here is a breakdown of consumer sales in fiscal 2014.

Fiscal 2014

Growth

Fiscal 2015 est.

Growth

Packaged Games

38.9 billion

+9%

49.0 billion

+26%

Digital Games

40.0 billion

+35%

52.4 billion

+31%

Toys

8.4 billion

Flat

9.7 billion

+15%

Animation

12.1 billion

+15%

13.9 billion

+15%

Total

99.8 billion

+19%

128.5 billion

+29%

Click to enlarge

As you can see, Sega's packaged games business and digital games business were each almost as big as the two amusement businesses in fiscal 2014. In fiscal 2015, both packaged and digital sales are forecasted to be bigger than every segment but the leading Pachinko segment if they weren't part of consumer businesses. The growth of these two subsets is amazing with estimates 25% higher for fiscal 2015. All told, the consumer business is the unit with the highest expected sales growth in fiscal 2015, with the continued success of the digital business and strong pipeline of packaged games. More important to shareholders, Sega Sammy expected the consumer unit's operating income to increase 230% to 6.6 billion for fiscal 2015.

Sega also provided its guidance for fiscal 2015, broken down by business segment.

Total Sales

450.0 billion yen ($4.4 billion)

+19%

Pachislot and Pachinko

217.5 billion ($2.1 billion)

+20%

Amusement Machine Sales

46.0 billion ($0.5 billion)

+19%

Amusement Center Operations

42.0 billion ($0.4 billion)

-3%

Consumer Business

128.5 billion ($1.3 billion)

+29%

Other

16.0 billion ($0.2 billion)

+10%

Click to enlarge

Risks

The biggest risk with investing in Sega Sammy Holdings is the fact that in the United States shares trade over the counter. This stock has average volume of 53,000 shares over the last three months, with many days trading less than 10,000 shares.

The company could see wide swings in share price with the release of the new Sonic game and Alien Isolation. One of these games underperforming could send shares to new lows.

A failure for Japan to approve casinos could send shares down as investors see Sega as a casino play. However the loss of Japanese casinos won't damage the long term perspective of Sega in my opinion.

Conclusion

Shares of Sega Sammy Holdings trade at around $5 a share. This is toward the low end of the company's 52-week range ($4.18 to $7.26). In 2014, shares are now down 21%. The last month has provided a short-term boost of 5% to shares. The company trades with over $1 billion net cash, which is more than 20% of the company's current market capitalization.

Take a look at the huge growth numbers expected across the board for fiscal 2015 and you will see Sega Sammy Holdings as an undervalued growth stock. Top line sales are expected to increase 19% after a successful 2014 year. The video game lineup and continued focus on digital is the main story heading into fiscal 2015. Strong sales of the Alien Isolation and Sonic games could easily send shares higher at their release dates. The casino catalyst is one for the long term, but is definitely worth considering for investors looking a long ways out. By the end of 2015, shares should hit new 52 week highs above $7.26. By 2020, shares could easily double with the new casino prospects and should be a double digit stock.

Disclosure: The author has no positions in any stocks mentioned, but may initiate a long position in SGAMY over the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

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