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Why Shares of Scientific Games Corporation (SGMS) Dropped in October

John Bromels, The Motley Fool

What happened

In Vegas, sometimes you win, but more often you lose. Las Vegas-based casino and lottery equipment manufacturer Scientific Games (NASDAQ: SGMS) found that out the hard way in October. According to data provided by S&P Global Market Intelligence, the company's stock fell 12.4% during the month.

It was the third month in a row of share price declines for Scientific Games, stemming from a court decision in August that severely punished the company. In addition, the company's crippling debt load is preventing it from getting back on its feet.

A man's hands shuffle a deck of cards on a green felt-covered table

Top casino equipment maker Scientific Games has underperformed the stock market for months. Image source: Getty Images.

So what

While Scientific Games has had balance sheet issues for years -- it has some $8.8 billion in long-term debt on its books, far outstripping its $2.4 billion market cap -- its current woes began in August when it got hit with a huge $315 million legal judgment. 

The case stems back to 2012, when a company called SHFL Entertainment filed a patent-infringement lawsuit against three companies that had collaborated on a competing card shuffler for casinos. SHFL claimed the device infringed on its intellectual property. In 2013, SHFL was bought by Bally Technologies, which in 2014 was purchased by Scientific Games.

So when the three collaborators sued in 2015, it was Scientific that was the defendant. In August, a jury agreed that SHFL had tried to stifle competition through the lawsuit and awarded the collaborators $105 million in compensatory damages, an amount that was tripled by the judge to $315 million. Although Scientific has vowed to appeal the verdict, and therefore hasn't had to cough up the money yet, the verdict caused a massive sell-off of the stock, which has continued to sink lower and lower since.

Now what

It appears that Scientific Games may have stopped the bleeding with its recent third-quarter earnings report. While Q3 income took a big hit thanks to the court verdict -- booked as a noncash charge since the legal process is still ongoing -- the company's revenue was up 7%.

Scientific's management also indicated it was eyeing the IPO of a minority interest in its social gaming business, possibly as soon as 2019. The IPO of business, which has seen rapid growth, would be used to pay down some of the company's massive debt load. Interested investors promptly bid shares up by 21%, reversing the October losses. Shares, though, are nowhere near their pre-verdict levels.

Still, the company's massive debt and its long-term failure to turn a quarterly profit -- something it hasn't managed since 2012 (!) -- make this a very risky stock. You might be better off putting your money into a one-armed bandit.

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John Bromels 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.