A Jackpot Stock For Your Portfolio
Declan is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
If you want a slice of Vegas, without having to go to Vegas, then take a look at Shuffle Entertainment (NASDAQ: SHFL). Shuffle Entertainment manufactures and distributes a range of gaming devices for the casino industry.
Why is it interesting?
Since the November 2012 low, the stock has been attracting interest from investors. There have been two periods of heavier volume buying: one in mid-December, and again at the start of February. December's buying was triggered by an Earnings Beat, with next earnings due on Mar. 4. February's surge followed an agreement with GameAccount Network (GAN) to provide its online gaming products on the GAN platform. The GAN Network run partnerships with the leading betting firms, including PaddyPower and William Hill, so this would be a big win for Shuffle Entertainment. However, regulatory approval is still required. Should it prove successful, it will offer European exposure for its products. Collectively, these price drivers have allowed Shuffle Entertainment to take out its September high of $16.23. Next in its sights is the multi-year high of $18.77 from early 2012.
Legalizing online gaming remains a contentious issue in the U.S., but this may be slowly changing. All eyes are on New Jersey's potential $1 billion online gaming market. Gov. Christie recently vetoed a bill to allow online gaming in the state, but has said he will support one if adequate provision is made for funding and treating gambling addiction.
The potential gains for Shuffle Entertainment are considerable when matched with the European story, the U.K. in particular. U.K. regulated online casinos accounted for $1.1 billion in revenue in 2012, although the UK Gambling Commission report suggests a large amount of the online gambling business is lost overseas. The Commission estimates the value of the online gambling market to be $31 billion. Should Shuffle Entertainment receive regulatory approval for the GAN partnership, the U.K. market will become open to them.
So Shuffle has the potential to see significant expansion on two fronts: domestic and overseas.
Anything in the Earnings Call?
While Shuffle Entertainment has plenty of potential, its existing market is performing strongly. The company reported record revenue, up 12% year-on-year for the comparable quarter and 14% for the fiscal year. The company has an outlined goal to reach an operating profit margin of 25% by 2013, and it finished last year at 22%.
Also in 2012, the company installed its first slot machines (630) in Latin America and Asia, with the intention of expanding the business in 2013. The overall slot machine business contributed $25 million in revenue for Q4 (34% of quarterly revenue), with 4,124 new machines added over the year.
Going forward, the company is focusing on strategic alliances to expand its global reach. One of the big ticket items is its iGaming infrastructure. The company is looking to spend an additional $10 million on the project. The goal is to have it running breakeven for the fiscal year, and contributing to profits after that.
What about its Peers?
The company is in direct competition with International Game Technology (NYSE: IGT), Bally Technologies (NYSE: BYI), and WMS Industries (NYSE: WMS). Shuffle Entertainment has a P/E that is slightly richer than its competition, coming in at 23.6. Its forward P/E of 17.1 only matches the current P/E valuations for International Game Technology and Bally Technologies (each have forward P/Es around 12). The P/E story is a little skewed by the respective price action of each stock. WMS Industries had been struggling before Scientific Games stepped in to buy the stock. Even so, its current P/E is the highest of the group. International Game Technology hasn't been able to follow through on its 2009 success, and has meandered while Shuffle Entertainment advanced. As a result, its P/E looks 'cheap.' Bally Technologies has a competitive P/E and is just a few dollars away from new multi-year highs and from a valuation perspective, looks the most competitive.
Going forward, all of the aforementioned companies will benefit on any loosening of U.S. online gambling laws, but Shuffle Entertainment has the added leverage of its potential European operations. Bally Technologies has no European exposure, with international operations limited to Canada and an intriguing pilot plan for South Africa. Bally Technologies is looking for some hardware and software revenue from its international division for every quarter over the next 2 years, but beyond that it couldn't offer more.
International Game Technology did have a European online poker network, until it closed. The company offered no specifics on European performance, but presumably their outlook for the region was poor so the poker network was shut down.
WMS Industries rolled out a U.K.-based real money platform, jackpotparty.com, in addition to B2B online casino managed services. The latter was rolled out in collaboration with Groupe Partouche in Belgium. The go live for the B2B services is expected in January 2013, and will involve a revenue share with Groupe Partouche. There is additional iGaming product line offered (for Europe) with their Jadestone subsidiary. The July release of Jackpot Party generated an average of $55 K in net daily revenue, off 500 K active users ($0.11 net revenue per active user / day). These figures are ahead of competitors in the space, offering reason for optimism in Shuffle Entertainment's European plans. WMS Industries consider this equivalent to revenues from 850 gaming machines in a land-based operation at favourable margins. It also sees this rising for the next quarter.
There are a couple of items that separate the aforementioned from Shuffle Entertainment. Shuffle Entertainment carries very little debt, just $1.3 million (a debt equity of 0.5). Bally Technologies carries over $0.5 billion in debt with a debt:equity ratio of 246, and International Game Technology isn't much better at $1.8 billion and debt:equity of 142. WMS Industries carries a more modest debt, but it's still higher than Shuffle Entertainment. Shuffle Entertainment's profit margin of 14.9% is slightly ahead of its peers, with WMS Industries weakest at 8.4%.
International Game Technology in the only stock to pay a dividend. Although the yield is small, it did recently increase the payment from $0.06 to $0.07 per quarter.
Finally, WMS Industries is supposed to be acquired by Scientific Games, so if you like the WMS Industries story, check out Scientific Games (assuming the deal goes through!).
The next swing lower in the broader market (e.g. around a 10% drop in the S&P) may be the time to start looking at Shuffle Entertainment. However, a push to new multi-year highs will make it more resilient to any drop in the S&P. And such push would likely be delivered on the passage of a New Jersey gambling act. Those fearing missing out may want to take a look at Shuffle Entertainment now.
fallond has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!