Gaming supply firm Shuffle Master (Nasdaq:SHFL) used to be popular among growth investors, but was increasingly abandoned as its rapid growth slowed after 2006. The credit crisis further hit the share price, but sales remained relatively stable throughout and profits have come back markedly. A low valuation implies significant upside in the stock.

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First Quarter Recap
Revenue increased 9% to $43.8 million and hit a first quarter record on growth in two of four operating segments. The utility unit, which sells card shufflers that help casinos speed up games, accounted for 39.6% of total sales. It saw sales fall a modest 1.4%. The table game unit sells poker, blackjack and other games to casinos, and saw rise 24.3% to account for 25.6% of sales. The sales for electronic table games, which rely on a virtual dealer instead of a live one, fell 2.9% to account for 18.6% of sales. The electronic games accounted for the rest of sales at 16.2% and reported robust 33.7% growth; this segment sells games via slot machines and related digital avenues.

Operating income grew to $7.1 million. Net income jumped nearly 31% to $4.8 million on lower interest expense and resulted in earnings of $0.09 per diluted share. (For related reading, see Zooming In On Net Operating Income.)

Outlook
Management didn't provide forward guidance but analysts currently project full-year sales growth of 8% and total sales of just over $217 million. Profit projections call for earnings of $0.53 per share for year-over-year growth of approximately 8%.

For the past few years, net income has vastly understated Shuffle Master's cash flow generation. Last year, free cash flow was approximately $48.9 million, or about $0.90 per diluted share; that places the trailing free cash flow multiple at less than 11.

Gambling was one of the most negatively impacted industries from the credit crisis and is just showing signs of recovering in the United States. International trends have been much more robust on new casino openings, especially in Asia, and have helped Shuffle Master hold up relatively well during the domestic downturn with growth alongside leading casino firms including Las Vegas Sands (NYSE:LVS) and Wynn Resorts (Nasdaq:WYNN).

The Bottom Line
Shuffle Master competes with much larger rivals such as International Game Technology (NYSE:IGT) and Bally Technologies (NYSE:BYI), but at the low cash flow valuation it has good downside protection and should see a recovery in its growth as U.S. gambling, which currently accounts for about half of sales, continues on its turnaround.

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