Is Scientific Games the Perfect Stock?

Every investor would love to stumble upon the perfect stock. But will you ever really find a stock that provides everything you could possibly want?

One thing's for sure: You'll never discover truly great investments unless you actively look for them. Let's discuss the ideal qualities of a perfect stock, then decide if Scientific Games (Nasdaq: SGMS  ) fits the bill.

The quest for perfection
Stocks that look great based on one factor may prove horrible elsewhere, making due diligence a crucial part of your investing research. The best stocks excel in many different areas, including these important factors:

  • Growth. Expanding businesses show healthy revenue growth. While past growth is no guarantee that revenue will keep rising, it's certainly a better sign than a stagnant top line.
  • Margins. Higher sales mean nothing if a company can't produce profits from them. Strong margins ensure that company can turn revenue into profit.
  • Balance sheet. At debt-laden companies, banks and bondholders compete with shareholders for management's attention. Companies with strong balance sheets don't have to worry about the distraction of debt.
  • Money-making opportunities. Return on equity helps measure how well a company is finding opportunities to turn its resources into profitable business endeavors.
  • Valuation. You can't afford to pay too much for even the best companies. By using normalized figures, you can see how a stock's simple earnings multiple fits into a longer-term context.
  • Dividends. For tangible proof of profits, a check to shareholders every three months can't be beat. Companies with solid dividends and strong commitments to increasing payouts treat shareholders well.

With those factors in mind, let's take a closer look at Scientific Games.

Factor

What We Want to See

Actual

Pass or Fail?

Growth 5-Year Annual Revenue Growth > 15% (0.4%) Fail
  1-Year Revenue Growth > 12% (5.7%) Fail
Margins Gross Margin > 35% 44.1% Pass
  Net Margin > 15% (19.1%) Fail
Balance Sheet Debt to Equity < 50% 302.1% Fail
  Current Ratio > 1.3 1.74 Pass
Opportunities Return on Equity > 15% (30.1%) Fail
Valuation Normalized P/E < 20 51.27 Fail
Dividends Current Yield > 2% 0% Fail
  5-Year Dividend Growth > 10% 0% Fail
       
  Total Score   2 out of 10

Source: S&P Capital IQ. Total score = number of passes.

With a score of only 2, Scientific Games doesn't seem like a great bet. But a recent change in the legal environment for online gaming could lead to a renaissance for the company.

You may not know the name Scientific Games, but you've almost certainly seen its products -- whether or not you actually buy them or just see them littering the street. Scientific Games is one of the companies behind the instant scratch-off lottery tickets that many states offer. In addition, the company also makes gaming equipment like server-based slot machines, having bought up International Game Technology's (NYSE: IGT  ) Barcrest subsidiary earlier this year.

Scientific Games has faced a number of challenges in recent years. Weakness in gaming overall has hurt sales both at Scientific Games and at rival IGT more than at other industry players such as Bally Technologies (NYSE: BYI  ) and WMS Industries (NYSE: WMS  ) . The company's high debt levels also play a big role in dampening enthusiasm for the stock even when it does produce good results.

The big news for Scientific Games, though, came after the Department of Justice said earlier this month that a law once thought to prevent online betting doesn't apply to all forms of gaming. That not only sent shares of U.S.-based casino companies like MGM Resorts (NYSE: MGM  ) and Boyd Gaming (NYSE: BYD  ) climbing through the roof, but also supported Scientific Games stock as well, given the potential for online-based lotteries and other products.

Online gaming may well have huge promise for Scientific Games, but investors seem to be taking it as a sure thing. With valuations that greatly exceed all of its peers, Scientific Games is already priced for perfection -- without having delivered it quite yet.

Keep searching
No stock is a sure thing, but some stocks are a lot closer to perfect than others. By looking for the perfect stock, you'll go a long way toward improving your investing prowess and learning how to separate out the best investments from the rest.

Click here to add Scientific Games to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.

Finding the perfect stock is only one piece of a successful investment strategy. Get the big picture by taking a look at our "13 Steps to Investing Foolishly."

Fool contributor Dan Caplinger doesn't own shares of the companies mentioned. The Motley Fool owns shares of International Game Technology and Bally Technologies. 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 Fool has a disclosure policy.


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