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On Jun 25, 2013, Zacks Investment Research downgraded Scientific Games (SGMS - Analyst Report) to a Zacks Rank #5 (Strong Sell).

Why the Downgrade?

The downgrade primarily reflects Scientific Games' weak results in the first quarter of 2013. The company failed to beat the Zacks Consensus Estimate in the trailing four quarters and its average surprise was (453.6%).

In the first quarter of 2013, Scientific Games reported a loss of 15 cents per share in contrast to the Zacks Consensus Estimate of a profit of 2 cents, primarily due to lower revenue growth and contracting margins.

Revenues decreased 5.0% year over year and 11.9% sequentially to $219.6 million, which missed the Zacks Consensus Estimate of $228.0 million. The top-line decline was primarily due to lower sales of lottery systems and terminals and lower-than-expected instant ticket revenues.

Higher expenses (increased 660 basis points as percentage of revenues) dragged down profit in the quarter. Operating margin was 5.1% compared with 10.8% in the year-ago quarter.

The Zacks Consensus Estimate for the second quarter of 2013 has declined 60.0% (3 cents) to 2 cents over the last 60 days.

The Zacks Consensus Estimate for 2013 decreased 78.3% (18 cents) to 5 cents per share over the last 60 days. The Zacks Consensus Estimate for 2014 dropped 22.2% (8 cents) to 36 cents per share over the same period.

Other Stocks to Consider

Not all gaming and lottery systems providers are performing as poorly as Scientific Games. We recommend International Game Technology (IGT - Analyst Report), which has a Zacks Rank #1 (Strong Buy). Bally Technologies (BYI - Snapshot Report) and Boyd Gaming Corp (BYD - Snapshot Report), both with a Zacks Rank #2 (Buy), are also looking good at present.

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