Can Recent Lottery Jackpots Power Scientific Games To First Quarter Earnings Beat?

Apr.10.12 | About: Scientific Games (SGMS)

In case you missed all the hoopla last week and the lines out the doors of gas stations and convenience stores, there was a record lottery jackpot. The Mega Millions drawing on March 30th represented a jackpot of $640 million. This nine figure sum represented the largest lottery jackpot of all time. The increased number of customers and tickets printed was beneficial to many individual states, local schools, and convenience stores. Today, I highlight a stock that could also benefit from the increased number of lottery tickets sold.

Scientific Games (SGMS) is a leader in instant lottery games and systems used to print them. They have contracts with nine states in the United States. Along with the United States, the company has a strong presence in Italy, and China. Six printing locations in America have the capacity to produce forty five billion instant lotto tickets.

The chart below shows how the sales have increased across each segment in 2011:

2009 2010 2011
Printed $467 million $474 million $503 million
Systems $257 million $236 million $242 million
Gaming $95 million $88 million $133 million
Click to enlarge

On February 28th, the company reported fourth quarter earnings. The earnings per share reported were break even. Last year's fourth quarter saw a loss of $0.03 per share. Revenue increased 12.7% to $239.1 million. Instant ticket sales saw a slight 0.6% increase in revenue. Lottery systems and terminals saw robust growth of 50.3% to $22.3 million. Service revenue was $94.4 million for the quarter, which was an increase of 24.9%. By regional segment, instant tickets were up 8.5% in the United States, up 15.7% in China, and flat in Italy. At the end of the fourth quarter, Scientific Games had $104.4 million in cash and $1.4 billion in long term debt.

Revenue for 2011 was $879 million. This is a slight decrease from 2010 ($882 million). When racing revenue is subtracted out of the past years, the revenue numbers for 2011 become significantly better.

2009 2010 2011
Revenue $928 million $882 million $879 million
Revenue Without Racing $819 million $799 million $879 million
Free Cash Flow $108.5 million $61.9 million $79.2 million
Click to enlarge

In the year 2011, Scientific Games won contracts for lottery systems in Colorado, Georgia, Illinois, Louisiana, Missouri, and New York, and the stock was recently upgraded by Roth Capital. Back in January, Wells Fargo (WFC) reported a 5% stake in the company.

A Forbes article back in January listed Scientific Games on its 2012 speculative buy list. Reasons given were:

  • The company being a leader in scratch off tickets.
  • Scientific Games being a leader in state lotteries.
  • The company being a finalist for the Greek lottery bidding.
  • Scientific Games large position in China's lottery.

At a recent Roth Capital Conference (March 13th), Scientific Games presented these as growth opportunities:

  • Expand instant ticket business internationally
  • Privatization/Outsourcing
  • Game enhancements/Content
  • Acquisitions
  • Expand server-based gaming outside of United Kingdom
  • iLottery/iGaming

Several negatives exist with buying shares of Scientific Games. The company's last four reported quarterly earnings have been all over the place with results. Against analyst's targets the earnings were -366.7%, +100.0%,-180.0%, and -190.0% respectively. On January 20th, Brean Murray downgraded shares of the company. One other big negative is the large number of insiders selling shares of the company.

Along with its own operations, Scientific Games owns significant stakes in the following companies:

  • 20% Lotterie Nazionali - Italy's instant game, largest instant game in the World
  • 49% CSG Lottery - Instant lottery games in China
  • 50% Guard Libang - Lottery systems and services in China
  • 20% Northstar Lottery Group - Private manager of Illinois State Lottery. Was the first state awarded private contract (July 2011)
  • 20% Sportech - United Kingdom betting site.
  • 29.4% Robert Communications Network - Communications provider.

Shares trade at $11.88 and are close to a fifty two week high. Over the last fifty two weeks, the stock has traded in a range of $6.50-$13.08. I think shares will rally after first quarter sales are reported. For the current March quarter, analysts are expecting a profit of $0.05 a share. Last year's first quarter saw a loss of $0.08 per share. Analysts are beginning to take note of this company and expect several recent large jackpots to boost earnings for Scientific Games. Share of Scientific Games are worth $20 by the end of 2012.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in SGMS over the next 72 hours.