Contract Loss Slams Scientific Games

Shares plunge 40% after rival Gtech snags a lottery contract from the state of Pennsylvania.
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Updated from 10:40 a.m. EST

Shares of

Scientific Games

(SGMS) - Get Report

plunged more than 30% Wednesday after rival Gtech snagged a big contract away from the gaming systems provider.

The stock recently was trading down $8.88, or 31.6%, to $19.27, paring its losses after earlier having fallen as much as 44%.

Gtech, owned by Italy's Lottomatica, said Wednesday that it won a five-year contract with the Pennsylvania State Lottery to provide online and instant systems, as well as 10,000 lottery terminals and related services.

Scientific Games currently provides terminal-based lottery services for Pennsylvania, which ranks as the sixth-largest state lottery in the U.S. based on total sales. Scientific Games' contract expires on Dec. 31; the Gtech deal is effective as of Jan. 1, 2009.

Scientific Games was paid about $50 million in the latest fiscal year under the contract, according to the state lottery system. In comparison, the company had revenue of $1.01 billion over the past 12 months.

The loss was exacerbated by the fact that Scientific Games has lost two other, smaller contracts -- in West Virginia and South Carolina -- this month.

Following the news, Morgan Stanley analyst Celeste Mellet Brown downgraded Scientific Games to underweight from overweight.

"Though we remain positive on the long-term potential of the company's international opportunities, contract losses and inconsistent execution by the company on its core instant business makes us bearish in the near term," she wrote.

Jefferies analysts Lawrence Klatzkin maintained his buy rating on the stock, based on the belief that Scientific Games has strong growth opportunities outside the U.S. online lottery business. Klatzkin said the company has upside potential from its international slot machine and instant lottery opportunities, which carry a higher return on investment than its domestic online business.

Scientific Games still has a five-year contract with Pennsylvania to provide instant game services. That deal was effective last April.

This article was written by a staff member of