Why Investors Took a Bad Beat in Shuffle Master

Meeting expectations is no longer good enough for game maker Shuffle Master (Nasdaq: SHFL  ) . The company's fiscal second-quarter earnings, reported yesterday, were in line with expectations, but after earnings had risen for most of the past year, people seemed to be hoping for more.

Revenue increased 10% to $66.1 million, and net income grew 23% to $9.7 million. The company's transition to a recurring revenue model is going well, and expansion in gambling around the world is helping the industry grow.

The company's acquisition of Ongame had a negative effect on the current quarter, but it should be a strength going forward. Shuffle Master is trying to position itself to capture some of the profits if online poker is legalized. Ongame provides capabilities across multiple devices for online gaming and could tuck well into new game platforms as they're built.

Gaming suppliers have seen expectations rise, with International Game Technology (NYSE: IGT  ) and Bally Technologies (NYSE: BYI  ) both experiencing strong growth in the gaming industry. But now that expansion in Asia is nearly complete and new gambling hubs are years off, the industry will have to rely on new games and the game-replacement cycle to provide revenue. Therein lies the problem for Shuffle Master.

If Shuffle Master isn't able to outperform expectations in the current environment, the pace of growth will probably only slow in the coming years. Las Vegas Sands (NYSE: LVS  ) is currently completing Sands Cotai Central, which will be the last new casino there until Wynn Resorts (Nasdaq: WYNN  ) opens its new resort a block away in four years.

The market reaction may seem overdone on the surface, because Shuffle Master did meet expectations, but in light of the run-up in shares and the dwindling growth opportunities, it seems more justified. Shares are now trading at 16 times fiscal 2012 earnings estimates, so there's beginning to be some value, but I wouldn't try catching this falling knife until the multiple falls a few more points.

Interested in reading more about Shuffle Master? Add it to My Watchlist, and My Watchlist will find all of our Foolish analysis on this stock.

Fool contributor Travis Hoium manages an account that owns shares of Wynn Resorts. You can follow Travis on Twitter at @FlushDrawFool, check out his personal stock holdings, or follow his CAPS picks at TMFFlushDraw. The Motley Fool has a disclosure policy. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.


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  • Report this Comment On June 05, 2012, at 11:06 PM, jallison4u wrote:

    Travis - always the crepe-hanger. I shall sell all my SHFL shares in the morning. Your logic is flawed: why buy a no-growth, no-divi, no-share buyback stock at any multiple?

  • Report this Comment On June 06, 2012, at 12:51 PM, cp757 wrote:

    Travis I just thought I would make an observation about the growth of the Cotai Strip."The pace of growth will slow in the coming years" is only true if you are talking about going from 40% growth to 20% growth. One large drawback is the lines at the boarder gates that cause 4 hour wait times. China will open those gates 24 hours a day now that Cotai Central is open.Las Vegas Sands (NYSE: LVS ) is currently completing Sands Cotai Central, and they will have 12,968 rooms with the addition of the rooms on Lot 3 which will be the last new casino there until 2017. With 12,968 rooms and a 50 to 60 billion dollar market by 2017 I think LVS is the best positioned casino in Macau.

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