August 25, 2008 - Scientific Games Corp. (SGMS-NASDAQ) supplies technology-based products, systems, and services to gaming markets worldwide. The company operates in three segments: PrintedProducts, Lottery Systems, and Diversified Gaming.

The Lottery Systems segment offers customized computer software, equipment, and data communication services to government-sponsored and privately-operated lotteries. It provides transaction processing software for the accounting and validation of instant and online lottery games, point-of-sale terminals, central site computers, and communications technology, as well as ongoing support and maintenance for these products. This segment also includes software and hardware, and support services for sports betting and operation of credit cardprocessing systems.

The Diversified Gaming segment offers services and systems to private and public operators in the wide area gaming markets and in the pari-mutuel wagering industry. Its product offerings include server-based gaming machines, video lottery terminals, monitor games, wagering systems for the pari-mutuel racing industry, sports betting systems and services, and amusement with prize and skill with prize terminals. Scientific Games Corporation was founded in 1984 and is headquartered in New York, New York.

And it does all of this worldwide. In fact, thanks to its China client base, earnings (released on July 31) beat analysts' expectations, coming in at 31 cents a share or $29 million. Excluding extraordinary items, they would have been 35 cents a share vs. predictions of 33 cents a share. Revenues were up 14% to $306 million for the quarter. Analysts expected $296 million. For the full year, forecasts are for $1.29, up from 93 cents last year. Next year, look for $1.54.

This stock was trading at $15.90 in January of this year, dropping from $40.70 late last year. That was a bad month for the company. It lost several lottery contracts, including one for a Pennsylvania online lottery which was the third contract loss in 30 days. Since then the stock has come roaring back.

Part of the recovery stems from a billion dollar refinancing package that paid off existing credit agreements, extended the average maturity of its outstanding debt and created additional borrowing capacity. Those earnings described above as well as a decent first quarter were the main reasons however.

Revenues for the second quarter were up 16% in the Printed Products Group, to $145 million. That's where the China connection comes in. The China Sports Lottery, which uses Scientific's products and services, reported weekly sales of $60 million. Annualized that's $3 billion. The Lottery Systems Group sales were upped by more than 15% to about $60 million. This division recently signed a contract with the China Sports Lottery for instant ticket activation, validation, and tracking services. The company receives a percentage of sales. When the second quarter ended, revenues increased by 15% while profits jumped by 25% compared to the same quarter last year.

SGMS just signed a six-year contract with the Florida Lottery where it will be the primary vendor to supply instant tickets and related services, including marketing, shipping, warehousing, inventory, and staff training. That's worth about $35 million in sales per year.

More numbers: Market Cap is $2.88 billion with 92.83 million shares outstanding but a float of only 38.6 million shares. Insiders own 32.2% of the stock while McAndrews & Forbes owns 28%. Price to Book is 3.87.
Profit margin is 5.68% with an operating margin of 11.42%. Return on equity is 9.3%. There's $178 million in cash in the treasury. Current ratio is 2.123. Book Value is $7.87 There is no dividend.

Scientific Games is growing, but many analysts fear the rate will slow. The consensus is for earnings to increase by 18.33% a year, on average, for the next 5 years. But that rate may already be in the price. The one unknown: how big will China be in the mix? It's a country that can make a big difference to SGMS. And the rest of the world is a large market as SGMS continues to expand outside the U.S. If more international contracts are signed, look for analysts to up their estimates. In the meantime, dig a little deeper, and if you like what you find, maybe in the future, there will be a dip in the price that offers a better entry point.

- Company Web site: www.scientificgames.com

- Ted Allrich