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Should You Invest In Scientific Games?

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Enterprise value to EBITDA

In this last part of the series, we’ll take a quick look at the one-year forward EV/EBITDA (enterprise value to earnings before interest, taxes, depreciation, and amortization) multiple of Scientific Games (SGMS) relative to its peer companies. This should help you decide if it’s a good bet to invest in Scientific Games, or SGMS.

As of December 26, 2014, the company’s one-year forward EV/EBITDA stood at 7.3x. That’s lower than the multiples for gaming rivals Penn National Gaming (PENN), Pinnacle Entertainment (PNK), and International Game Technology (IGT).

The above chart shows that SGMS’ valuation multiple dropped significantly the week ending December 26, 2014, even though its share price increased during this period. Wall Street analysts covering this company have increased their EBITDA estimates for 2015 during this period. Those same analysts are expected to increase consensus revenue estimates for SGMS by ~22% in 2015. And consensus EBITDA estimates should anticipate a ~45% increase 2015.

Key takeaways

SGMS’s current valuation is lower than that of its competitors. This is likely because the market isn’t pricing in the company’s future earnings growth as projected by analysts who are expecting EBITDA growth of ~45% with an EBITDA margin of 41% in 2015.

However, one important factor that could be a concern for investors is the level of the company’s debt exposure. SGMS’ latest net debt-to-EBITDA stands at 10.7x, which is quite a lot higher than the industry average of about 5.0x. Also, for the three months ended September 2014, SGMS reported net losses of ~$70 million, even though revenues increased by a whopping 77% on a year-over-year basis.

Considering all these factors, SGMS’ share price direction in the near future could be uncertain. Investors who would like to avoid the risk of investing in a single casino company may instead opt to invest in the Consumer Discretionary Select Sector SPDR Fund (XLY).

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