US and Japan Remain The Key For Aristocrat

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This story features ARISTOCRAT LEISURE LIMITED.
For more info SHARE ANALYSIS: ALL
The company is included in ASX20, ASX50, ASX100, ASX200, ASX300 and ALL-ORDS

By Chris Shaw

In the last quarter of last year management at Aristocrat Leisure ((ALL)) gave earnings guidance to the market for the 2007 year and yesterday the company delivered on that guidance and more, its profit of $246.1m pre-abnormals coming in about 2% above market consensus with the dividend also a little better than expected.

While the headline number was good in divisional terms the result was a little more mixed, JP Morgan suggesting the Australian and South American operations did better than expected but Japan and the Other International division were a little weaker, while Merrill Lynch viewed the Other International result as better than it had expected.

Post the result most brokers agree the group’s outlook for its operations in Japan is improving as the company has released some new machines into the market, JP Morgan anticipating some market share gains and Merrill Lynch expecting the group will generate sales of 50,000 units for the year compared to its previous forecast of 30,000.

UBS is also more positive towards the Japanese operations on the back of the result and management comments, which support the broker’s modest increases in earnings estimates. Following the result the broker expects earnings per share (EPS) this year of 63c, up just more than 1% from its previous forecast, and 83c in 2009.

In comparison JP Morgan is forecasting EPs of 59.3c this year and 72.1c in 2009, the broker having increased its forecasts by 5.5% and 4.7% respectively on the back of the result. ABN Amro has EPS forecasts of 62.1c and 71.3c for 2008 and 2009, while Thomson One Analystics shows median EPS estimates of 63c and 77c.

A reason for caution in ABN Amro’s view is the potential for further weakness in the key North American market, the broker noting orders in the market appear to be slowing along with the economy. With peer orders also slowing the broker suggests the current half won’t be a turnaround period in terms of that market’s replacement cycle, especially as currency movements also pose a risk to earnings.

This supports the broker’s Hold rating on the stock, a recommendation Merrill Lynch also supports given the stock has rallied of late and is now seen as trading closer to fair value. JP Morgan takes the view while some shorter-term issues remain the company is well positioned for the longer-term and so is deserving of a Buy rating.

Macquarie agrees, suggesting seasonality issues should see a stronger second-half this year, especially as in its view the US gaming market outlook is improving. Both Credit Suisse and Deutsche Bank have decided their forecasts for 2008 in particular were too high and have trimmed forecasts, but like JP Morgan and Macquarie they see value in the stock at current levels and so both retain Buy ratings.

Overall the FNArena database shows seven Buy ratings compared to three Holds, with an average price target of $13.34, up from $13.22 prior to the profit result. Thomson One has a median price target on the stock of $12.80.

Shares in Aristocrat today are slightly stronger in a higher overall market and as at 1.10pm were up 5c at $10.65, which compares to a trading range over the past 12 months of $8.72 to $17.55.

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