Q4 2008 Earnings Call

January 15, 2009 5:00 pm ET

Q3 2008 Earnings Call

September 9, 2008 5:00 pm ET

A reader in the gaming industry asked me about Shuffle Master Inc (NASDAQ: SHFL). For all I know, Shuffle Master may make the best gaming products in the industry, supplying casinos with electronic tables, automatic shufflers, chip sorters and other gaming products. But for various reasons, we wouldn't go near this stock for our portfolio.

First, this company only has $155 million in tangible assets, but it's financed with debt of $222 million! For a value investor, this screams of risk. If hard times should hit this company, it is in no position to meet its obligations, and this would obliterate the value of its shares. As discussed here, we like companies with low debt levels that can outlast their competition when times are bad.

Q2 2008 Earnings Call

June 9, 2008 5:00 pm ET

With the proliferation of casinos all across the United States, especially on Native American reservations, there may be an opportunity in the manufacturers of the slot machines, video poker machines, and bingo machines. According to the U.S. Bureau of Labor Statistics, because of the growth of and increasing popularity of Indian casinos and racinos [a racetrack with a casino], employment in gaming services occupations is projected to grow by 23 percent between 2006 and 2016, which is much faster than the average for all occupations.

You will have to decide if any of the following stocks are worth betting on.

Shuffle Master Inc. (SHFL)

Q1 2008 Earnings Call

March 17, 2008 5:00 pm ET

Shuffle Master, Inc. (SHFL)

F4Q07 Earnings Call

January 10, 2008 5:00 pm ET

Deutsche Bank notes they have uncovered that Shuffle Master's (SHFL) Board of Directors has engaged an executive recruiter in order to replace Chairman and CEO Mark Yoseloff. Firm believes Yoseloff is cooperatively involved and that this ultimately should be positive for SHFL.

Yoseloff has been with SHFL for a decade and during his leadership revenues have grown nearly tenfold to approximately $200m. He has been vocal over time that his operating sweet spot tops out around these levels of revenue. Yoseloff's strength has clearly been product development and they'd expect for him to remain affiliated with the company in some type of product strategy and development capacity once a replacement is named.

Shuffle Master Inc. (SHFL) has become then newest addition to our portfolio as the stock is trading at extremely attractive levels.

Shuffle Master focuses on providing casinos with a variety of gaming equipment including chip sorting devices, table games, and most notably automatic card shufflers. The stock took a hit about a month ago after a disappointing earnings report.

The Wall Street consensus expectation was for $0.13 on $43 million in sales. Obviously with sales above expectations but earnings below, there was a margin problem:

TWST: Would you tell us about the outlook in Macau and other parts of Asia?

Bullish calls:

But catalysts for the next upturn are already taking shape and by the time they solidify, gaming-equipment stock valuations may not look as reasonable as they do now.

Geography

Description: SHFL specializes in providing its casino and other gaming customers with automatic card shufflers and chip sorting devices to improve their profitability, productivity and security, as well as entertainment products, including poker, blackjack, baccarat and pai gow poker-based table games. The company, whose 320 employees were responsible for $120M in sales last year, owns roughly 20,000 shufflers and 4,000 table games.

Positive Considerations: Shuffle Master is an unequivocal play on the Macau casino boom. Anything casino-related is enjoying massive penetration rates there because of the explosive demand for a wide array of services (Macau is the fastest growing casino market in the world). With 90% market share, enviable intellectual property, a stellar portfolio of gaming titles, and first mover advantage (SHFL has done business in Macau for over 10 years), Shuffle Master presents a compelling play on casino growth abroad. For years, table games' share of the U.S. casino market contracted, giving way to more space for slot machines. Today, we're seeing the reverse: tables are making a comeback, especially overseas, where tables hold more weight than slot machines. Fortunately for SHFL, this is particularly the case in Macau. Hence, SHFL is in the right place at the right time.

The company developed the first automatic card shuffler in 1991 and now owns 90% of the worldwide market. More than 20% of the company's revenue comes from outside the United States, which we like, because the US space is arguably saturated. Gross margins are white hot (75%+) while cap ex is perennially low. Shuffle Master is a small firm in a large category, but its market dominance is impressive. Besides International Gaming Tech (IGT), we can't think of a better way to bet on the internationally-driven gaming explosion. SHFL's revenue has climbed at a 24% CAGR over the past five years and we think replacement demand should keep the stock afloat for the forseeable future, although a couple of more analyst downgrades could be on their way (see the risks section below).

When I look at a market like Macau which is a 90% table game market, clearly shufflers, we are -- we're a leading supplier right now because of shufflers. But that's an area where electronic delivery of table games is going to be extremely important, really for two reasons.