Having devoured seemingly half the manufacturing sector, Scientific Games is having some digestion problems. J.P. Morgan analyst Joseph Greff came off the 3Q15 conference call 
and promptly halved his price target for the stock “given SGMS’s high operating and financial leverage … we remain Neutral until we gain increased confidence in planned post-Bally Technology–related acquisition costs cuts and synergies translating into stronger free cash flow conversion.”
Scientific missed Wall Street‘s consensus for its cash flow, which it blamed on one of its customers postponing an order from 3Q15 to 4Q15. An eroding installed-slot base didn’t help either, “down 1,751 units year over year.” This is the consequence of seven straight quarters of decline in the slot base. Participation games were up 898 units from last year, which somewhat offset a 19% dropoff in slot sales. Greff predicts 52,000 slot machines will have to be replaced in the coming year and Scientific will get a 35% slice of that market.
“Strength in instant games was offset by weakness in lottery systems and product sales.” Greff wrote, adding that low growth was expected 
in this sector and Scientific’s lottery revenues were down 10%. On a happier note, interactive gaming was up 11%, with an 83/17 split between social and real-money games. It’s a small piece (8%) of the Scientific pie but one that obviously has real potential.
Deutsche Bank analyst Carlo Santarelli termed the earnings call “the eyes wide open moment some have been waiting for,” as Scientific simply wrote off $535 million of that will o’ the wisp known as “goodwill.” (In other words, ‘The assets weren’t worth what we paid for them.’) These writedowns, Santarelli said, “call out the reality that future cash flows will be lower than previously articulated, something we’ve consistently believed would be the challenge for this stock.”
Santarelli wasn’t as nonplussed as Greff, though, only shaving a dollar from his price target ($10). He found that “margins were stronger than expected” and “the real money online segment 
continues to show solid traction,” while “instant ticket revenue was up a solid 5% y/y.” On the downside were the shrinkage in installed slots, ” the impairments, which serve as an indictment of recent acquisitions” and “1+1 is either equaling less than 2 or the domestic replacement landscape continues to shrink as SGMS replacement units were again down double digits y/y.” The management-systems facet of Scientific’s business prism also fared poorly.
Has Scientific bitten off more than it can chew? It sounds that way but, if anyone can turn this around, CEO Gavin Isaacs can.
