Odds Improving For Aristocrat

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

 – Aristocrat's earnings beat guidance
 – Brokers lift forecasts as positive momentum continues
 – Capital management initiatives expected
 – Credit Suisse upgrades to Outperform

By Chris Shaw

Having guided to a full year net profit after tax of $85-$90 million, gaming machine producer Aristocrat Leisure's ((ALL)) profit of $91.7 million was well received by the market. The better than expected result reflected higher average selling prices in both North America and Australia in particular and strong net operating cash flows.

Management has indicated further earnings improvement is expected in FY13, which in JP Morgan's view reflects ongoing positive momentum across Aristocrat's business. Deutsche Bank suggests the growth expected in the coming year will be driven by game and product quality, new game releases, improved operational performance and ongoing market share gains.

One area of interest in terms of future earnings potential is social gaming, and to this end Aristocrat recently acquired Product Madness. The new assets are not considered likely to make a meaningful contribution to earnings short-term, but as JP Morgan points out the deal will allow the market to see what potential revenue could be generated from the online gaming space.

Given the better than expected full year earnings from Aristocrat, brokers covering the stock have lifted forecasts going forward. Deutsche has lifted its earnings estimates by 6-7% through FY14, while Credit Suisse's numbers have been increased by 5-7% across the same period.

Consensus earnings per share (EPS) estimates for Aristocrat according to the FNArena database now stand at 19.3c for FY13 and 23c for FY14. The changes to earnings forecasts have impacted on price targets, as the consensus target for Aristocrat according to the database has risen to $3.11 from $2.90 previously. 

Looking forward, UBS sees potential for capital management from Aristocrat given a strong balance sheet and good cash flow generation. Credit Suisse agrees, both brokers seeing a share buyback as a likely form for any such move. As Credit Suisse points out, Aristocrat's balance sheet is approaching under-geared levels, as net debt to EBITDA (earnings before interest, tax, depreciation and amortisation) stands at 1.2 times at present. The broker has factored a buyback in FY14 into its model.

In terms of ratings for Aristocrat, the FNArena database shows four Buy recommendations, three Hold ratings and one Sell. Valuation underpins the Buy rating of Deutsche Bank, the broker noting the stock is trading around 10% below its valuation at present, with the added attraction of potential capital management in coming years.

Credit Suisse agrees, having upgraded to an Outperform rating from Underperform previously. The change follows the broker taking a new approach to valuation for the company, which results in the broker's price target increasing to $3.50 from $2.60. This has Credit Suisse at the top of price targets for Aristocrat among brokers in the FNArena database, with BA Merrill Lynch the low mark at $2.58.

This supports BA-ML's Underperform rating, which is based on the view Aristocrat's growth will continue to slow given ongoing market headwinds, a virtual embargo on the Victorian market and expectations for a less favourable sales mix.

In a stronger overall market today shares in Aristocrat are higher and as at 11.20am the stock was up 11c or 3.6% at $3.16. This compares to a range over the past year of $2.16 to $3.25, the current share price implying downside of nearly 2% relative to the consensus price target in the FNArena database.
 

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