(By Balaseshan) Deutsche Bank analyst Carlo Santarelli downgraded rating of Scientific Games Corp. (NASDAQ:SGMS) to "Hold" from "Buy" and lowered price target to $7 from $10, citing limited catalysts and tough visibility.
Santarelli believes the trajectory of the SGMS business model has stagnated and is now more reliant than ever on tough-to-handicap and somewhat binary legislative events for which the value to SGMS is difficult to quantify.
Given future opportunities are tough to handicap and quantify, and the competitive bidding is fierce; recent acquisitions have called into question the capital allocation strategy; the core business has become more competitive and faces structural challenges; the China instant ticket business has regressed; and Italian scratch off trends have softened further, the analyst downgrades rating and cut price target.
With SGMS shares trading at 5.1x EBITDA, adjusted for JV contributions, at present, Santarelli believes the likely question is why downgrade shares here following a roughly 16% decline in the month to date.
For starters, the analyst believes Consensus forecasts for the 2H and 2013 are aggressive and more importantly, he thinks the near term news flow around the name is more likely to serve as a headwind for the stock. At present, he sees changes in insider ownership as the lone potentially positive catalyst for the stock.
In conjunction with Santarelli's downgrade, he is cutting estimates. His estimate revision stems from lower than previously anticipated 2Q revenue, lower JV contributions, and lower operating margin.
The brokerage reduced its 2012 recurring EPS estimate to $0.12 from $0.36 and its 2013 estimate to $0.22 from $0.63. The brokerage also cut its 2012 adjusted EBITDA estimate to $334.6 million from $365.3 million and its 2013 estimate to $343.7 million from $399.8 million.
SGMS is trading down 10.08% at $6.29 on Tuesday.