Though the same probably can't be said for its ultimate customers, lottery machine maker Scientific Games (NASDAQ:SGMS) announced another stellar quarter Monday night. Revenues for third quarter 2004 rose 36% to $179.3 million, while profits came in at $0.24 per share, up 62% over year-ago numbers and well above the analyst consensus estimate of $0.21 per share.
Feeling its hot streak is likely to continue for the near future, the company also boosted its earnings guidance for the year to the $0.84 to $0.88 range. The market adjusted accordingly, sending shares of Scientific Games up 8% in Tuesday trading.
Despite the irony of its name -- the only scientific conclusion about lotteries is that you shouldn't play them -- the company has a lot going for it. If you believe in relative strength, its stock price is up more than 50% from year-ago levels and has just broken out to a new 52-week high. But more fundamentally, Scientific Games sports an increasing 41% operating margin and rising levels of free cash flow, and insiders own a significant share of the company. While the valuation was clearly more attractive at this time last year, at 21 times 2005 earnings, Scientific Games still isn't overvalued.
There is one blemish worth noting, though. This $2 billion company carries $430 million in net debt (total long-term debt minus cash on hand) on its balance sheet. Analyzing debt levels is tricky, and an increasing debt load for a company that is on an acquisitions spree -- it recently announced its intent to acquire a German instant ticket supplier for an undisclosed amount -- is a mixed signal at best.
However, in this case, a large part of the debt is the $143 million price Scientific Games paid for International Game Technology's (NYSE:IGT) Online Entertainment Systems business in late 2003. The acquisition not only boosted company's revenues by more than 25% but also provided key access to international markets in the Caribbean as well as Europe and Asia. With rival GTech Holdings (NYSE:GTK) reeling from allegations of bribery, the company was able to snag a lucrative $67 million, seven-year online lottery contract in Puerto Rico.
While the large debt load will remain an issue, this is a profitable business at heart. At its current valuation, Scientific Games offers investors a good opportunity to grab a piece of the growing gaming industry pie, especially if concerns over GTech's business practices continue to linger.
Fool contributor Marko Djuranovic does not own shares of any companies mentioned in this article. He lives in New York City and has yet to win the lottery.
