Bargain hunters in Scientific Games Corp. should know that those shares come with high accounting and governance risk. The New York lottery service provider’s managers have prioritized their own interests in the past and reported on the company’s finances with optimism.
Scientific Games’s financial statements reflect that it’s had a very aggressive AGR since September, indicating higher accounting and governance risk than 93% of the companies in North America.
To be sure, some market players see a bright future for the company. Chairman and CEO A. Lorne Weil said in a statement this February that he hopes to grow the business by taking steps such as investing overseas. And as cash-strapped state governments search for ways to make revenue, the U.S. Justice Department said in recent months that using the internet to sell lottery tickets doesn’t violate the Wire Act. The opinion “could provide substantial growth opportunities for the industry in the years to come,” Weil said.
Scientific Games’ stock price traded at $10 per share near closing time on Tuesday, down around 1.6% for the day after having risen in earlier trading, according to Yahoo. It had plunged more than 8% on Monday. The chart below shows that recently, for a short period, investors had been growing more optimistic about the company’s prospects. However, this trend has reversed. Scientific Games has underperformed its benchmark index over the last year, as it faces continued accounting and governance risk.
Investors should consider the company with caution. Scientific Games is effectively controlled by one person, the billionaire Ron Perelman. He owns a third of the company through MacAndrews & Forbes, the holding company of which he is the sole stockholder.
The managers have awarded themselves remarkable payments over the years. For example, Weil has been board chairman since October 1991, but he took a brief hiatus from his role as CEO in 2008. When he returned to the post in 2010, he received sign-on equity awards consisting of two million options and two million restricted stock units. The extraordinary size of this award, highly concerning even as a “golden hello” to a new executive, is even more so as a “golden welcome-back.”
In another example, the company employed Weil’s brother Richard as vice president of international business development under an agreement dated January 1, 2003. In July 2004 he received a complex severance package that involved $498,100 in cash as well as other components such as options and deferred stock valued at $918,000 and $385,000, respectively.
Meanwhile the company’s accounting of past acquisitions, such as its purchase of the U.K.-based fixed odds betting terminal supplier Global Draw Limited in 2006, reflects that Scientific Games paid more than the market price for its investments and continues expecting a return at some later date. Time will tell whether Scientific Games eventually is able to realize the revenue potential implied by the high price it paid for its acquisitions.
GMI Ratings gives Scientific Games an F on its corporate governance. The company’s spokeswoman did not respond within press time to a request for an interview.
Region: North America
Sector: Cyclical Consumer Goods / Services
Industry: Casinos / Gaming
Market Cap: $1,044.8mm (Mid Cap)
ESG Rating: F
AGR: Very Aggressive (7)