Tickers in this Article: SHFL, LVS, WYNN, BYI, WMS, IGT
Gambling product and service provide Shuffle Master (Nasdaq:SHFL) reported solid second quarter sales results last Wednesday. Profit trends were more subdued, but cash flow generation remains strong. Looking out over the longer haul, one of its divisions should continue to grow robustly in Asia while its other operating units will have to wait for an overall recovery in gaming across the world.

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Second Quarter Recap
Sales jumped 18% to $59.9 million. Shuffle Master divides its business into four operating units. The utility unit sells products that help casinos run table games more quickly and efficiently. It includes products such as automatic card shufflers and chip sorting machines. It logged a sales decline of 9.1% and represented 32% of total sales. Electronic table systems sells digital games, such as those with virtual dealers. It saw sales decrease 5.2% to account for nearly 20% of total sales. Proprietary table games consist of blackjack, poker and baccarat tables and reported a modest sales increase of 3.7% to account for nearly 18% of total sales.

Electronic gaming machines reported impressive sales growth of 160% and made up nearly 31% of sales. This unit sells PC-based video slot machines primarily in Australia, Asia and Latin America, and competes with larger industry players including International Gaming Technology (NYSE:IGT), Bally Technologies (NYSE:BYI) and WMS Industries (NYSE:WMS).

Operating income advanced only 7% to $12.2 million as sales costs and R&D expenses increased at a faster rate than sales. Lower interest income and higher income expense further tempered profit growth as net income grew less than 1% to $7.95 million. Higher shares outstanding sent earnings down nearly 7% to 14 cents per diluted share. Operating cash flow of $8.2 million slightly exceeded reported net income.

Outlook
Analysts currently project full-year sales growth of 8.7% for total sales just north of $218.4 million. The current consensus earnings estimate is 56 cents per share.

With exposure to the faster-growing Asian market, Shuffle Master should continue to grow its electronic gaming machines along with clients in the region that likely include Las Vegas Sands (NYSE:LVS) and Wynn Resorts (Nasdaq:WYNN). Its other units are looking lackluster in comparison, but this is not proving enough to offset overall strong sales growth.

Cash flow generation is also coming in rather strong at over $15 million, which reflects impressive growth over last year's $4.6 million figure. The forward earnings multiple is reasonable at 13.8, well below the trailing PE multiple.

Bottom Line
There is upside potential in SHFL as slot machine growth is there and the other divisions should improve along with the overall gaming industry. The overall gaming industry is growing gangbusters in Asia and will inevitably recover in the U.S. and other developed markets that are still climbing back from the latest recession. (So you've finally decided to start investing. But what should you put in your portfolio? Find out here. Check out How To Pick A Stock.)

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