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The gaming industry has been the focus of many investors since 2008, primarily due to the collapse of the real estate market in Las Vegas and the drop in consumer spending. Today we look at Shuffle Entertainment (NASDAQ:SHFL), a company that manufactures and distributes gaming devices, and operates inter-casino linked systems and slot routes. In our opinion, it has shown several signs of improvement.

We will discuss the fundamentals that could be encouraging in the long run. We will also discuss the valuation of the company's competitors WMS Industries (NYSE:WMS), and Bally's Technologies (NYSE:BYI).

Valuation

SHFL Entertainment stock trades at $15 versus its 52-week range of $8.69-$18.77, a P/E multiple of 21x, and a forward P/E of 18x. More importantly, the stock is trading at a discount to its long-term historical average of 28x. The company's competitor WMS Industries trades at a P/E multiple of 13x, and a forward P/E of 12x. Bally's Technologies stock trades at a P/E of 15x, and a forward P/E of 13x.

Encouraging trends for Shuffle Entertainment:

1. The company has a strong balance sheet with cash of $28 million, and long- term debt of $16 million. Additionally, the company is free cash flow positive, which leaves room for a possible dividend in the future
2. The new Deckmate 2 shuffler, which is expected to be much faster, adds to the product line and revenue base going forward
3. In June, 2012, the company dropped plans to acquire Ongame Network, due to the decline in business conditions in Europe. This action encourages us to think that preservation of liquidity, and better deployment of capital is a priority for the company
4. Continued economic weakness in municipalities might mean legalization of gaming facilities

Risk related to investing in Shuffle Entertainment remain the following:

1. Increased competition in the specialty table game market
2. A weak macro environment, which might mean less disposable income in the hands of consumers
3. Continued expenses related to patent litigation

The chart below compares share performance over the past year. "E"s mark earnings reports. (click to enlarge)

Conclusion: The valuation looks attractive, and management has become very disciplined with the company's balance sheet. Also, there are several encouraging trends in the market to make the Shuffle Entertainment stock an investment consideration for your radar screen.

For those of you looking for additional investment ideas in the gaming industry, take a look at our recent report.

Written by Kapitall's Sabina Bhatia. Tool provided by Kapitall.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Source: Shuffle Entertainment: An Encouraging Play In The Gaming Industry