Scientific Games Corp. (SGMS) reported dismal second quarter results due to higher expenses. Instant lottery sales declined in Italy and China, which remains a major headwind in the near term.
We believe that the visibility regarding its privatization and outsourcing of state lottery management, while a major growth opportunity, remains murky, thereby adding significant uncertainty to the stock. Moreover, increasing investments for product development and strong competition is expected to hurt profitability in the near term.
Overall, this negative scenario compels us to downgrade the stock to an Underperform recommendation. We set a price target of $7.25, which implies a P/E multiple of 80.6X our 2012 earnings, a premium to both industry and S&P 500 average.
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