Why Scientific Games Corporation's Shares Popped 266% in 2017
What happened
Shares of lottery and casino game maker Scientific Games Corporation (NASDAQ: SGMS) jumped an astonishing 266.4% in 2017, according to data provided by S&P; Global Market Intelligence, as investors became more confident the company would survive long-term. The company is still losing money, to the tune of $199.2 million in the first nine months of the year, but revenue is rising and debt is falling so the company may be able to turn its financials around in 2018.
So what
There were a number of discrete drivers of the stock jumping, but most centered around Scientific Games reporting better than expected earnings. When it did that, the company's highly leveraged balance sheet also put leverage on the stock returns, leading to the big jump we saw in shares in 2017.
Image source: Getty Images.
The chart below gives a high-level overview of operations and you can see that over the past year revenue is up, debt is down, and EBITDA (a proxy for cash flow) is also on the rise. As a result, the net debt leverage ratio, measured as net debt divided by EBITDA, has fallen from 7.4 to 6.7, which is high but manageable if operations continue to improve.
SGMS Revenue (TTM) data by YCharts
Now what
With high risks comes the potential for high rewards in investing. Even though Scientific Games isn't profitable, its operations are improving quickly enough for investors to stop pricing the company as if it has a high likelihood of bankruptcy and more like it's going to be a long-term winner in the growing lottery and gaming businesses. That's the transition that happened in 2017 and it made the stock one of the best on the market.
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Travis Hoium has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
