Shuffle Master: More than a Gamble

11/26/2004 12:00 am EST

Focus:

Vahan Janjigian

Editor, Bottom Line's Money Masters Stock Report

The Forbes Growth Investor maintains an ongoing list called its Top 50, made up of those stocks ranked highest by its quantitative system. From these, a handful are seleted for its model portfolios. Here's the latest addition to the Conservative Growth portfolio - a gamble on gaming.

"Shuffle Master (SHFL NASDAQ) is benefiting from the growing worldwide popularity of casino gambling. The company is best known for making machines that automatically shuffle cards. Automatic shufflers help deter cheating and make it significantly more difficult for players to count cards. Their key benefit, however, is that they generate more revenue per table per hour by eliminating the need to manually shuffle cards, which takes more time. As a result, the company’s products increase productivity and enhance security.

"The company makes an extensive range of automatic shufflers. These include the ACE brand of single deck shufflers, the Deck Mate brand of continuous shufflers, and shufflers that can handle up to eight decks at a time. Shufflers are driven by algorithms and computer-generated instructions designed to ensure that all shuffles are fully random. This segment also produces Bloodhound, a software system capable of detecting card counting and cheating. Its Intelligent Table System can track a player’s progress and collect data that is often used by casinos to target complimentary products to their best customers.

"SHFL also develops and markets proprietary table games such as Let It Ride, Let It Ride Bonus, Three Card Poker, and Four Card Poker. An acquisition earlier in the year allowed SHFL to expand its offerings to include other well-known games including Fortune Pai Gow, Royal Match 21, and Casino War. This segment also markets a side bet recognition system and a fully electronic and automated table game called Table Master, featuring an interactive virtual video dealer.

"While SHFL sells its products, about two-thirds of revenues are generated from leasing and licensing fees. Total revenues for Q3 rose 50% year-over-year to $23.1 million. Utility Products revenues jumped 39% to $12 million as SHFL placed more than 600 new shufflers in the quarter bringing to 1,724 the number of units placed through the first nine months of this year. This surpasses the figure for all of 2003. Entertainment Products revenues increased 65% to $11 million. SHFL is seeing extremely strong demand in foreign markets and recently opened an office in Macau. International sales accounted for 19% of the total for Q3, up from just 9% a year ago. Despite lower gross margins due to acquired businesses, net income climbed 35% to $6.3 million or $0.26 per share.

"Although the company has a 65% market share, competition is stiff. Indeed, SHFL recently filed separate patent infringement lawsuits against two competitors. The company is also subject to laws and regulations at the federal and state levels, and in Native American jurisdictions. The company’s products must be tested and approved by jurisdictional or independent bodies such as Gaming Laboratories International, which recently approved the next generation Table Master unit. SHFL currently has six of the top ten proprietary table games on the market. Its Three Card Poker game is extremely popular and interest is keen for the newer Four Card Poker game. An investment in this stock is no sure thing, but it’s more than a gamble."

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