Australia | Jul 24 2006
By Chris Shaw
Last week both ABN Amro and Deutsche Bank upgraded Aristocrat Leisure (ALL) to Buy from Hold, moving the overall rating on the stock to positive according to the FN Arena database. It shows there are now six Buy ratings compared to four Neutral recommendations.
With the company soon to release its half yearly profit result Credit Suisse and Merrill Lynch have also updated their coverage and while not changing their ratings from Neutral and Buy respectively, both see upside potential in the stock.
For Merrill Lynch it is a case of an overreaction providing a buying opportunity, as it suggests the current share price weakness resulting from management downgrading the outlook for sales to Japan in the short-term has caused the share price to fall excessively.
The broker estimates the share price has fallen by 22% recently on concerns over the Japanese operations, though the cut it has made to earnings to adjust for the outlook is far less than this amount.
The broker has taken 9% from its profit forecast for 2006, cutting it to $241m, but it has increased its forecast in 2007 by 3% to $351m, which translates to EPS growth of more than 45%. Credit Suisse is forecasting a similar result for this year of $246.5m, down 1% from its previous forecast, while next year it expects a result of $338m.
The broker suggests the share price is likely to continue to be volatile as it reacts to news out of Japan, indicating it remains possible the stock could trade as low as $11.50 in the short-term. This would represent a buying opportunity in its view, as it points out the Japanese market will improve given regulations in place require machines to be updated, while the company’s performance in North America, which it views as a key growth market, continues to be solid.
Merrill Lynch on the other hand suggests investors ignore the current volatility to buy now, as waiting for a cheaper entry price could mean missing out as the stock is likely to strengthen once investors turn their attention to the strong earnings growth on offer next year.
It suggests even at a price of $14.40, which is a significant premium to the current price of less than $12.00, the stock would only be on a multiple of 19x earnings for next year, which is not regarded as expensive given the earnings growth expected. Supporting its positive view is the company’s solid growth performance in North America, while it points out a resumption of sales to Russia could add 5% to its current earnings estimates.
The broker’s target price and valuation on the stock are $15.90, which compares to Credit Suisse’s target of $14.45. The Average target according to the FN Arena database is $14.47, while Thomson One Analytics has a median price target of $13.90.
Aristocrat shares closed last Friday at $11.76 but are down further to around $11.60 in early trading today.