Buy Scientific Games (SGMS) on Pullback - Janney

Janny affirmed Scientific Games (Nasdaq: SGMS) with a Neutral rating and $11 fair value estimate, suggesting that investors buy the stock on any pullback with channel check indicating stronger competition for fewer CapEx dollars.

Analyst Brian McGill offered the following commentary:

• There was a hint of optimism on the SGMS EPS call on August 3, 2015 that the operators would see additional cap ex dollars for slot machine spending in 2016. Our checks indicate this is not the case and replacement activity in 2016 will be flat over 2015 in the 50K to 55K unit range. Without a major new disruptive technology, slot replacements across the industry are unlikely to move higher anytime soon.
• The concern among industry contacts is that while SGMS is continuing to find "synergies," the rest of the industry is actually spending more. Competitors such as Aristocrat, IGT, GCA (through MGAM), Konami and the smaller manufacturers are ramping up R&D and adding new cabinets and titles. Our contacts believe SGMS is eventually set to be 25% share of the replacement market going forward in North America. This is a considerable drop from the potential 40% chatter about a year ago. The channel checks for the competition have gotten better, while SGMS has seen declines.
• The endless obsession with "synergies" from investors continues for the merged company, while the revenue line continues to show the challenges in the business. The replacement share has dropped, the new pipeline remains rather anemic for the industry, operators are making it less lucrative and more difficult to keep participation games on floors, and the former SHFL strength in the international segment has evaporated. All of these will outweigh the potential gains from additional cuts to the cost structure.
• We ultimately believe the FCF story will disappoint the bulls. In this quarter, the company will benefit from the timing of the $110 mln interest payment that moves to the 4Q from the 3Q. Other than that, we expect the company to continue to scramble and consider questionable long-term strategies, such as selling pieces of the leased installed base

For an analyst ratings summary and ratings history on Scientific Games click here. For more ratings news on Scientific Games click here.

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