Goldman Sachs Sees Odds Stacked Against These Gaming Stocks

In a report published Wednesday, Goldman Sachs analyst Steven Kent initiated coverage of the Gaming Technology coverage group with a Cautious view, saying that the businesses were facing “too many secular negatives for the equities to outperform.”

Analyst Steven Kent pointed out that although there had been consolidation in the industry, it remained “highly competitive”, while end-user demand was weak. “High financial leverage and complex businesses will likely reduce PM interest and also likely make it difficult for the companies to handle secular issues,” he added.

Goldman Sachs initiating coverage of Scientific Games Corp SGMS with a Sell rating and a price target of $7.50.

Referring to the company’s recently closed merger with Bally Technologies Inc BYI, Kent said, “We expect integration will be SGMS’ primary focus, and without the near-term ability to de-lever, we think the stock will be volatile without outperforming.”

Kent enumerated four “major factors” that would result in the underperformance of Scientific Games:

1. Acquisitions had made the company more complex, with too many “irons in the fire,” and the company could suffer from “growing pains.”
2. The company was “the single most levered company in our coverage” and had limited near-term ability to de-lever. With limited cash flow, the company had about $8.4bn in net debt.
3. “Why buy the stock when the debt offers better returns?”
4. The need for capex may offset the impact of lowering expenses in order to boost free cash flow

Analyst Steven Kent initiated coverage of International Game Technology Ordinary Shares IGT with a Sell rating and a price target of $15.50.

Although International Game Technology was less levered than Scientific Games, there was “limited clarity around synergies, cash use, and brand integration,” Kent said, while adding that the company was likely to be “challenged by acquisition-related issues, declining market share, and concentration in Italy/lottery.”

The Goldman Sachs report enumerated three “major factors” that could lead to underperformance by International Game Technology:

1. The company had recently merged with GTECH and could experience “growing pains while facing merger pains”
2. The Slot Survey had indicated that the company’s market share was continuing to contract. The Survey indicated that 44 percent slot managers would buy fewer IGT machines versus last year.
3. The company’s concentration in Italy and in lottery could create headwinds