If you want a slice of Vegas, without having to go to Vegas, then take a look at SHFL entertainment Inc (NASDAQ:SHFL). Shuffle Entertainment manufactures and distributes a range of gaming devices for the casino industry.
Why is it interesting?
Since the November 2012 low, the stock has been attracting interest from investors. There have been two periods of heavier volume buying: one in mid-December, and again at the start of February. December's buying was triggered by an Earnings Beat, with next earnings due on Mar. 4. February's surge followed an agreement with GameAccount Network (GAN) to provide its online gaming products on the GAN platform. The GAN Network run partnerships with the leading betting firms, including PaddyPower and William Hill, so this would be a big win for Shuffle Entertainment. However, regulatory approval is still required. Should it prove successful, it will offer European exposure for its products. Collectively, these price drivers have allowed Shuffle Entertainment to take out its September high of $16.23. Next in its sights is the multi-year high of $18.77 from early 2012.
Legalizing online gaming remains a contentious issue in the U.S., but this may be slowly changing. All eyes are on New Jersey's potential $1 billion online gaming market. Gov. Christie recently vetoed a bill to allow online gaming in the state, but has said he will support one if adequate provision is made for funding and treating gambling addiction.
The potential gains for Shuffle Entertainment are considerable when matched with the European story, the U.K. in particular. U.K. regulated online casinos accounted for $1.1 billion in revenue in 2012, although the UK Gambling Commission report suggests a large amount of the online gambling business is lost overseas. The Commission estimates the value of the online gambling market to be $31 billion. Should Shuffle Entertainment receive regulatory approval for the GAN partnership, the U.K. market will become open to them.
So Shuffle has the potential to see significant expansion on two fronts: domestic and overseas.
Anything in the Earnings Call?
While Shuffle Entertainment has plenty of potential, its existing market is performing strongly. The company reported record revenue, up 12% year-on-year for the comparable quarter and 14% for the fiscal year. The company has an outlined goal to reach an operating profit margin of 25% by 2013, and it finished last year at 22%.
Also in 2012, the company installed its first slot machines (630) in Latin America and Asia, with the intention of expanding the business in 2013. The overall slot machine business contributed $25 million in revenue for Q4 (34% of quarterly revenue), with 4,124 new machines added over the year.
Going forward, the company is focusing on strategic alliances to expand its global reach. One of the big ticket items is its iGaming infrastructure. The company is looking to spend an additional $10 million on the project. The goal is to have it running breakeven for the fiscal year, and contributing to profits after that.
What about its Peers?
The company is in direct competition with International Game Technology (NYSE:IGT), Bally Technologies Inc. (NYSE:BYI), and WMS Industries Inc. (NYSE:WMS). Shuffle Entertainment has a P/E that is slightly richer than its competition, coming in at 23.6. Its forward P/E of 17.1 only matches the current P/E valuations for International Game Technology and Bally Technologies (each have forward P/Es around 12). The P/E story is a little skewed by the respective price action of each stock. WMS Industries had been struggling before Scientific Games stepped in to buy the stock. Even so, its current P/E is the highest of the group. International Game Technology hasn't been able to follow through on its 2009 success, and has meandered while Shuffle Entertainment advanced. As a result, its P/E looks 'cheap.' Bally Technologies has a competitive P/E and is just a few dollars away from new multi-year highs and from a valuation perspective, looks the most competitive.