Catalysts Cause A Difficult Sell Call For Scientific Games

• Scientific Games Corp SGMS shares have lost 25 percent in the past month, despite a 14 percent jump over the last five trading days.
• Deutsche Bank’s Carlo Santarelli upgraded the company from Sell to Hold, while maintaining the price target at $10.
• Although there are limited catalysts, Santarelli said that the recent pullback in shares and low expectations call for the upgrade.

Analyst Carlo Santarelli said that, while the fundamental outlook for Scientific Games’ core businesses remains “largely unchanged,” the shares are down about 35 percent since Deutsche Bank’s prior coverage, as compared to a decline of about 5 percent in SPX during the same period.

Santarelli added that the upgrade is based on valuation as there is no longer “meaningful downside in shares.” The risk-reward appears “far more balanced” in view of:

1. A strong management team
2. An optically fair FCF yield of 16.4 percent on FCF estimate for 2016
3. Some encouraging signs in the domestic gaming industry

Deutsche Bank noted, “We believe replacement activity will continue to plod along at trough levels and we see a more muted expansion pipeline in the US.”

“While there are expectations of a still challenging backdrop and limited visible near term catalysts, we simply believe valuation and diminished expectations make a Sell call too difficult here, unless one truly believes bankruptcy potential exists, which we do not,” Santarelli wrote.