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Is Scientific Games the Perfect Stock?

Dan Caplinger
December 30, 2011

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.


What We Want to See


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 suc