Please ensure Javascript is enabled for purposes of website accessibility

Why Shares of Scientific Games Corporation (SGMS) Dropped in October

By John Bromels – Nov 8, 2018 at 5:37PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The gaming industry manufacturer was still struggling with fallout from a court judgment.

What happened

In Vegas, sometimes you win, but more often you lose. Las Vegas-based casino and lottery equipment manufacturer Scientific Games (LNW 1.55%) found that out the hard way in October. According to data provided by S&P Global Market Intelligence, the company's stock fell 12.4% during the month.

It was the third month in a row of share price declines for Scientific Games, stemming from a court decision in August that severely punished the company. In addition, the company's crippling debt load is preventing it from getting back on its feet.

A man's hands shuffle a deck of cards on a green felt-covered table

Top casino equipment maker Scientific Games has underperformed the stock market for months. Image source: Getty Images.

So what

While Scientific Games has had balance sheet issues for years -- it has some $8.8 billion in long-term debt on its books, far outstripping its $2.4 billion market cap -- its current woes began in August when it got hit with a huge $315 million legal judgment. 

The case stems back to 2012, when a company called SHFL Entertainment filed a patent-infringement lawsuit against three companies that had collaborated on a competing card shuffler for casinos. SHFL claimed the device infringed on its intellectual property. In 2013, SHFL was bought by Bally Technologies, which in 2014 was purchased by Scientific Games.

So when the three collaborators sued in 2015, it was Scientific that was the defendant. In August, a jury agreed that SHFL had tried to stifle competition through the lawsuit and awarded the collaborators $105 million in compensatory damages, an amount that was tripled by the judge to $315 million. Although Scientific has vowed to appeal the verdict, and therefore hasn't had to cough up the money yet, the verdict caused a massive sell-off of the stock, which has continued to sink lower and lower since.

Now what

It appears that Scientific Games may have stopped the bleeding with its recent third-quarter earnings report. While Q3 income took a big hit thanks to the court verdict -- booked as a noncash charge since the legal process is still ongoing -- the company's revenue was up 7%.

Scientific's management also indicated it was eyeing the IPO of a minority interest in its social gaming business, possibly as soon as 2019. The IPO of business, which has seen rapid growth, would be used to pay down some of the company's massive debt load. Interested investors promptly bid shares up by 21%, reversing the October losses. Shares, though, are nowhere near their pre-verdict levels.

Still, the company's massive debt and its long-term failure to turn a quarterly profit -- something it hasn't managed since 2012 (!) -- make this a very risky stock. You might be better off putting your money into a one-armed bandit.

John Bromels has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Light & Wonder, Inc. Stock Quote
Light & Wonder, Inc.
$47.96 (1.55%) $0.73

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 10/05/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.