SGMS

Publicly traded companies mentioned herein: Glu Mobile Inc (GLUU), International Game Technology PLC (IGT), Kroger Co/The (KR), Scientific Games Corp (SGMS), Sciplay Corp (SCPL), Seven & i Holdings Co Ltd (3382 JP), Walmart Inc (WMT)

Highlights

The presenter is long shares of Scientific Games Corp (SGMS), which develops products for the gaming and lottery industries. In 2015, the company had two successful lines of revenue, lottery and slots, but also had an unhealthy balance sheet consisting of ~$8.5B in net debt (~8 turns of leverage). At that time, management’s goal was to grow each of the businesses and reduce its leverage. Yet, SGMS has only modestly grown these two legacy businesses and has failed to delever, the latter of which is cited frequently by bears. The presenter justifies the lack of deleveraging by pointing to acquisitions made and infrastructure built which will allow SGMS to grow its legacy businesses at moderate rates and newer businesses (iGaming and sports betting) to grow more significantly. He expects FCF to fall in the $350MM – $400MM range this year (~$4 per share) and grow to ~$450MM (~$5 per share) in 2020. If his bullish thesis about iGaming and sports betting is correct, he could see FCF growing to $1B+ over the medium term, which would yield a stock price of ~$100 per share given what he considers to be a fair 9x FCF multiple (assuming no debt paydown). In the short term, he thinks share prices can rise from the current ~$24 per share (~5x his forward FCF estimate) to the mid-$40 range (~9x his forward FCF estimate) as the company shows performance improvement and the iGaming and sports betting industries continue to expand.