Our Global Technology Growth Star investment strategy this week looks at Scientific Games Corp. (NASDAQ:SGMS). It is always revealing what management chooses for its first slide on an investor pack. Reducing debt was the theme clearly chosen by SGMS management for their first slide, and for good reason. Since a takeover of Bally Technologies in November 2014 SGMS has been groaning under the weight of $8.9 B in long term debt that costs $597 M per year in interest.
Will SGMS Debt Goals Happen?
Source: SGMS Q2 Investor Presentation
When you compare interest costs to AEBITDA of $519 M and realize the company has debt of 6.5 times AEBITDA then you can clearly see risk and reason for the balance sheet focus. Still, SGMS has strengths with gambling technology often sharing the very stable and steadily growing revenues the gambling industry provides. Many business units rely on long term contracts with good margins and only one or two direct competitors in a particular area or game. But is it worth risking an investment in SGMS for the strong operations with the risk of choking on this debt mountain?
Test 1: Strong growth for years
SGMS has been growing revenue consistently in recent years at a very decent clip. Source: Caterer Goodman from SGMS data
The growth surge of 2014 and 2015 however was driven by takeover activity. Takeovers are how SGMS ended up with all that debt. Takeovers are also key to understanding the growth strategy of SGMS.
SGMS is growing organically, although slowly.
SGMS has been able to eke out some organic growth. The first 2 quarters of 2019 revenue grew just 1.5% from $1.657 B to $1.682 B. That’s better than nothing, but hardly a growth stock.