Card-game equipment maker Shuffle Master (NASDAQ:SHFL) reports its fiscal Q2 2006 earnings results tomorrow after close of market. Want to know what Wall Street expects to see? Read on. Want to know what really matters? Read on a bit more.

What analysts say:

  • Buy, sell, or waffle? Analysts have become less optimistic about Shuffle Master over the last three months. Only six now rate it a buy, and the holds have risen to five.
  • Revenues. Thanks in part to the company's acquisition of Australia's Stargames back in February, sales are expected to rise 40% in tomorrow's news, to $38.1 million.
  • Earnings. Profits are predicted to increase 16% to $0.22 per share.

What management says:
In the Q1 earnings release back in April, CEO Mark Yoseloff announced the acquisition of the 5% of Stargames shares not already acquired in February. Calling this "the largest acquisition in our Company's history," Yoseloff argued that Shuffle Master's "domestic and international opportunity has never been better."

Profits-wise, the firm is targeting 25% growth in quarterly profits for each quarter of this year and hoping to achieve 28% to 31% profits growth for the year. Fools should be aware, however, that these predictions are "pro forma" -- in both a bad and a good way. They do not include the effects of stock options dilution (bad). On the good side, though, neither do these predictions include any extra profits flowing Shuffle Master's way from the Stargames acquisition, which Yoseloff advised could be "neutral to slightly accretive."

What management does:
Last quarter, Shuffle Master saw tremendous sales growth in its gaming equipment (called "Utility Products"), but a sales decline in its licensing of new games (called "Entertainment Products") to customers. With sales of physical goods being, of course, less profitable than the licensing of ideas, this kept Shuffle Master's margins moving along their long-term slide. Result: Rolling gross, operating, and net margins are all lower today than they were 18 months ago.

Margins %

10/04

1/05

4/05

7/05

10/05

1/06

Gross

77.1

76.4

75.2

74.8

74.1

72.5

Op.

42.7

42.2

41.3

41.2

39.4

38

Net

28.5

25.8

25.4

26.1

25.9

25.2
All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ended in the named months.

The Fool says:
Although generally optimistic about the company, which he originally recommended in the May 2004 issue of Motley Fool Stock Advisor, co-Stock Advisor analyst Tom Gardner continues to have concerns about the company's balance sheet, terming it "not immune to trouble."

I agree, on both points. On the "trouble" part, I note that Shuffle Master grew its sales 29% year over year in the last six months. However, its average level of inventories grew 34%, and its accounts receivable were up 84% on average. On the other hand, the company has been steadily paying off its long-term debt over the last year, and cash and equivalents returned to their year-ago level last quarter. If the company can get its bill collection in order and start converting more of its inventories into cash (possibly at the next replacement cycle), that will only accelerate the balance sheet's return to full health.

Competitors:

  • Bally Technologies (NYSE:BYI)
  • International Game Technology (NYSE:IGT)
  • PokerTek (NASDAQ:PTEK)
  • Vendingdata (AMEX:VNX)
  • WMS Industries (NYSE:WMS)

Shuffle Master is a Motley Fool Stock Advisor pick. Take the newsletter for a 30-day free spin.

Fool contributor Rich Smith does not own shares of any company named above.