What happened
Shares of Scientific Games (NASDAQ: SGMS), which provides gambling products and services to casinos, were up 12.7% as of 12:30 p.m. ET on Wednesday. The company capped off a strong year of growth with the announcement that it is shifting its strategy to unlock more value for shareholders.
Management plans to significantly pay down debt and repurchase shares. This comes on top of the current divestiture of its lottery and sports betting businesses, which could raise up to $7 billion in net cash proceeds.
So what
The news comes on the heels of a strong finish to the year. Revenue from continuing operations grew 20% year over year to $580 million in the quarter. The bottom line also improved from a loss of $143 million in the year-ago quarter to a profit of $62 million in the fourth quarter.
The company is in the process of selling off its lottery and sports betting assets, which should raise plenty of cash to help deleverage its balance sheet. Management's target is to bring its net debt leverage ratio down from 3.5 to 2.5 by the end of the second quarter.
Image source: Getty Images.
Now what
The stock currently trades at a modest 15 times trailing free cash flow, which management clearly sees as a good deal. The company authorized a three-year $750 million share repurchase program, representing 12% of the company's current market cap (share price times total shares outstanding).
Usually, these moves by companies to shore up finances, pay down debt, repurchase stock at attractive valuation levels, and focus on growing the core business -- in this case, digital and casino gambling products -- receive a big thumbs-up from investors, which explains the stock's jump today.
Over the long term, management is guiding for double-digit revenue growth, excluding acquisitions, and expanding profit margins. At a modest multiple to free cash flow, there could be further upside for this stock if management can execute on its goals.
Scientific Gaming could be an under-the-radar growth stock worth exploring.
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John Ballard 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.
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