“Solid quarter but headwinds persist for Scientific Games, according to Credit Suisse analyst Ben Chaiken. Gaming (SGMS’ #1 segment) plummeted 66% last quarter, even as cash flow in the lottery, social-gaming and digital spheres rose. “Management noted that 90% of casinos are open, but ~75% of their machines are turned on, a dynamic that may continue to drag on results,” wrote Chaiken. And despite forays into Internet gambling, regular gaming is still Scientific’s bread and butter. “While we think iGaming and Online Sports Betting are very exciting businesses but SGMS may not be the best way to express this view,” added Chaiken, in an unusually pointed criticism for Wall Street.
Shrinking (-4%) installed slot base is a cause for concern: “We see continued risk that this installed base comes down as operators figure out which machines they can ‘turn on’ and keep, and which machines they can potentially dispose of. Gaming operators have discussed material margin improvement since opening … and we don’t think slot machines will be left out of the cost cutting.” More bad news for Scientific is that operators are devoting larger and larger spaces to sports books, square footage that is coming at the expense of slots. Chaiken thinks SGMS could outperform, given “faster COVID recovery” but there’s not much hope of that at the moment.
Joseph Greff over at JP Morgan was even more cautious, saying “stay neutral” on the stock. Noting that the 3Q report was “unsurprising” and came in line with estimates, Greff added, “Revenues of $698m were 3% below our $720m on lower Gaming, which decreased 49% y/y due to ongoing disruptions related to COVID-19.” Other than that, Mrs. Lincoln, how did you enjoy the play? Well, Greff noted that all other divisions were up 16%, “demonstrating solid/sustainable growth” and that the company was sitting on $1.2 billion in liquidity. Ron Perelman being out of the picture “SGMS has a more diverse shareholder base, and also a reconstituted board that aims to ‘review strategic options to improve and maximize shareholder value with an objective to de-lever the balance sheet.'”
About the best Greff could say about the integral Gaming sector was that it was “uncertain,” noting that the company carried $9.5 billion in debt. He ratcheted down his 4Q20 cash-flow projection, adding that digital gaming “came in better than expected” but was offset by a slight ($4 million) miss in the SciPlay subsidiary. With 70-80% of slot machines in action, slot yield fell 31%. Slot sales toppled 52%, “unsurprising given the capex constraints enacted by many casino operators.” A bright spot were lottery sales, up 9.5%, driven primarily by the Italy and Turkey markets. Our best advice is to stand by Golden and, if you’re sticking with Scientific, hang on for a bumpy ride.
