Term Paper: Shuffle Master Is a Little

Pages: 5 (1404 words)  ·  Bibliography Sources: 1+  ·  Level: College Senior  ·  Topic: Economics  ·  Buy This Paper


[. . .] However, this ignores the nature of Shuffle Maker's ownership; institutional investors hold the company, which means that management answers to a relatively small number of people. Insiders, however, with less than 10% ownership of the company, could be easily muscled out if a faction fight was at stake.

Should Shuffle Maker borrow money for expansion? If revenues are indeed growing at 20% a year, this may not be necessary; it indicates that the company is mostly self-financed. Shuffle maker recently repurchased a million shares. A share repurchase seemed unnecessary; the only real reason for a share repurchase is to take away a number of stocks that seem to be depressing share value. However, this could have been a clever move suggested by the company's institutional shareholders; when a company repurchases stock and drives up share value, investors needn't pay taxes at a high rate on this increase as they would on a dividend. Even so, this could indicate that Shuffle Maker has hit a wall; that it cannot find new projects to invest its money in. This is evidenced by Shuffle's Cash flow statement: Shuffle spent more money on investments and stock repurchases than it did on operating costs.

This suggests that Shuffle needs new ways to spend its money, indicating that it isn't growing as fast as it could. Because it is such a small company, Shuffle can't take this extra cash and use it to acquire another company, as would suit another company with too much cash and not enough projects to invest in. Another option for spending this money could be overseas expansion. Shuffle currently caters to markets in the southwest, but could expand its operations in other gambling areas such as Indian Reservations, cruise ships, and close foreign cities such as Montreal.

Advocates of the efficient market hypothesis could argue that this company has already been 'discovered' by institutional value-seekers, which explains its price jump of approximately 50% over the course of the last year. Because institutional buyers maintain the closest relationships with management, they probably have the best indication of earnings estimates for the last quarter of 2003.

Management has indicated that expenses are stabilizing, and we tried to reflect this in our pro-forma statement. Only SG&A expenses and research expenses seem to be increasing at a rate that reflects revenue growth over the last few quarters. We expect this trend to continue going forward. Management believes that its sales expenses reflect the fact that they are capable of producing at a higher capacity than they have in the past, and that many of their expenses are fixed.

Sales type leases are a new balance sheet item, and indicate the existence of leases that are held for the depreciable life of a product. Companies that may wish to enjoy a higher return on assets prefer these leases. Shuffle's decision to list these separately reflects the fact that a sales-type lease is essentially an asset. Sales type leases create stability because a lease that exists in perpetuity is a predictable revenue stream.

We expect the occasional effect of a share repurchase will offset the periodic issuance of shares. This should bode well for Earnings per Share projections, which are expected to increase to 33 cents a share over the course of a year. We expect interest income to remain constant. In the last quarter, Shuffle Maker paid taxes totaling approximately 32% of earnings before taxes. We projected a 33% tax rate going forward over the course of the next four quarters.

Shuffle Maker is a company with strong growth and good prospects. It is unburdened by debt and enjoys high operating margins. Its performance is inelastic to the unpredictable effects of the market. Many of its revenues are derived from sales-type leases, which are a stable source of income, as they exist in perpetuity. The company is an institutional favorite and much smaller than its competitors.

We believe that the company's price reflects its value. The value of Shuffle Maker's stock climbed from below 20 since February and now stands at approximately 30. Recent performance indicates that earnings growth was in line with analyst expectations. This company should… [END OF PREVIEW]

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