Aristocrat Slapdown Prompts Upgrades

This story features ARISTOCRAT LEISURE LIMITED. For more info SHARE ANALYSIS: ALL

By Greg Peel

Yesterday gaming machine company Aristocrat Leisure ((ALL)) provided the market with first half profit guidance (ALL accounts on a calendar year) without providing an operational update. That will come with the result release in August. The company is expecting a profit for the half of $30-33m.

Given Aristocrat's profit for the first half last year was $24.9m, this implicit increase of around 26% should have had investors rather excited, particularly given the current economic climates in the company's markets of Australia, the US and Japan. However the figure has fallen well short of market expectations, and hence the market reacted by selling down ALL shares by 11% yesterday.

This excessive response has nevertheless caught the attention of stock analysts. While earnings forecast and target price downgrades have followed, three brokers have subsequently upgraded their recommendations on share price weakness and value on offer.

Aristocrat has now fallen around 24% since April, notes Citi. Revenues in the US have been impacted by discounting from competitors but market commentary suggests the situation is not getting any worse. Market share in Australia has held up in New South Wales but slipped in Queensland according to survey data, although Citi notes increased revenues from pubs and clubs (ex-casino) have helped to offset market share loss. Citi has dropped its target to $2.95 from $3.13 but upgraded to Buy from Neutral, citing “compelling value” with new casino openings in the US and demonstrated growth in Asia supporting the broker's 23% earnings growth forecast for 2012.

Macquarie notes Aristocrat's earnings before interest and tax (EBIT) was split 35/65 between the first and second halves in 2011. This would imply even stronger guidance numbers for the second half although making some adjustments for comparative performance numbers and currency sees Macquarie assuming a 40/60 split. The analysts believe Aristocrat will continue to face challenges in all markets, but yesterday's fall was enough to bring valuation into line with estimates, prompting Macquarie to upgrade its rating to Neutral from Underperform while lowering its target to $2.60 from $2.85.

BA-Merrill Lynch agrees Aristocrat is now trading in line with fair value and mid-cycle multiples, having cut earnings forecasts and reduced its target to $2.57 from $2.98. Merrills thus retains Neutral.

Deutsche Bank had already assumed consensus forecasts for Aristocrat's first half to be overblown, and as such guidance has come in only slightly below the analysts' own numbers. Deutsche has not altered its earnings forecasts or target, which remains at $2.50. On yesterday's sell-off the analysts' rating also moves up to Hold from Sell.

Guidance fell short of the UBS analysts' forecast, prompting a cut to earnings and a target price reduction to $3.15 from $3.50. However as indicated by a more ambitious target than peers, UBS already held the lone Buy rating in the FNArena database and that has not been changed today. UBS likes Aristocrat's leverage to a cyclical recovery as well as long term industry fundamentals and barriers to entry.

Credit Suisse remains unconvinced, and has stuck to its Underperform rating despite share price weakness. The analysts see no improvement in US operating environment, do not believe 2012 is the year for market share gains in Queensland, and notes new games have not really gained traction in Japan as hoped. Credit Suisse's target falls to $2.40 from $2.50.

Outside the FNArena database, both Goldman Sachs (Neutral) and Morgan Stanley (Equal-weight) have retained their ratings, waiting to learn more operationally at the August result. 

A quick look at FNArena's Stock Analysis on ALL shows a consensus 12-month target price for the stock now sitting at $2.80, which is down from $2.96 yesterday but still offering around 11% upside. Following three broker upgrades the database Buy/Hold/Sell ratio sits at 2/5/1. On new earnings forecasts, consensus is for 33% earnings growth in 2012, dropping back to 26% in FY13. Dividend yield, on the other hand, is forecast to rise from 3.3% this year to 4.6% next year.
 

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