Just look at the numbers: Shuffle Master (NASDAQ:SHFL) finished fiscal 2003 with a gross margin of 77% and a net margin of 25%.
Since management announced its decision to sell off its lower margin, non-core slot business last week, its stock has jumped 20% to $36 per share. It has also risen tenfold over the past five years. Like slot giantInternational Game Technology (NYSE:IGT), the company has benefited greatly from the spread of legalized gaming. And, as one of the industry's premier table game product suppliers, Shuffle Master is an exceptionally profitable, quickly growing business that has carved a pair of very successful niches for itself.
Driving the impressive margins is the attractive table games business, which has become a growing focus. During fiscal 2003, Shuffle Master generated $21 million -- 31% of sales -- in high-margin royalties for its Let It Ride and Three Card Poker games, which in recent years have become staples in casinos around the country. The company recently added Four Card Poker and Dragon Bonus to the lineup to compete in a space that includes Mikohn (NASDAQ:MIKN), the company behind Pai Gow Poker and Caribbean Stud Poker.
Among other notables, casino operator Lakes Entertainment (NASDAQ:LACO) -- 80%-owner of the wildly popular World Poker Tour -- has also moved to attempt development of the next blockbuster table game.
And then there's the company's core card shuffler business, in which Shuffle Master is the default brand. Accounting for almost half of revenue, its products help increase security and speed up the games -- meaning the casinos get more money in play, and thus make more money. For the widespread multiple-deck blackjack games, Shuffle Master's automatic shufflers eliminate shuffle times.
The stock is no longer cheap at 30 times 2004 earnings, and investors should be wary of the company's high short ratio. That said, with its two core product areas, Shuffle Master is an up and comer to keep an eye on.
Do you have thoughts on Shuffle Master? Take 'em to its discussion board.
Jeff Hwang owns shares of Lakes Entertainment, and can be reached at [email protected].
