Further Downside Risks 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

Market consensus earnings for FY08 for gaming machine group Aristocrat Leisure ((ALL)) were around $236 million until yesterday, when management cut guidance for full year earnings to a range of $190-$200 million to reflect weaker conditions in the US market in particular.

According to Citi the bad news may not end there, as with five months to go until the end of the year there remains downside risk to earnings, particularly as conditions in the US continue to deteriorate. As an example the broker notes new unit numbers have fallen 25% in just the past month, which suggests things may yet get worse.

As the updated guidance caught the market by surprise brokers have scrambled to revise their earnings estimates, with cuts to both FY08 and FY09 estimates of 20-30% flowing through as a result. This puts consensus earnings per share estimates at 41.2c in FY08 and 49.9c in FY09, though there is little confidence in the new figures as the likes of Citi and JP Morgan have cautioned the risk to earnings remains to the downside given the weakness in the US gaming market, no signs of a turnaround in the Japanese market and potential for delays to the machine replacement cycle in Australia.

What could also cause a problem for earnings would be an external CEO appointment, as Citi points out an outsider may take time to go through operations before making what is regarded as the appropriate decisions to turn around the company’s fortunes. Regardless, Macquarie makes the point management are now on the nose with the market as the revision to guidance comes only three months after the guidance was given.

This means share price outperformance is unlikely, which has caused ABN Amro to downgraded its rating on the stock to Sell from Hold and Citi to Hold from Buy. Why more brokers have not downgraded their ratings is answered by Merrill Lynch, who points out while it too rates the stock as Underperform there should be strong earnings growth for the company once the cycle turns more positive.

Even Deutsche Bank agrees, seeing little prospect for a quick turnaround in the company’s fortunes, though the broker has retained its Buy rating as it too sees better times ahead – in the longer-term. Overall the FNArena database shows the company is rated as Buy twice, Speculative Accumulate once, Hold five times and Sell twice, with the average price target falling to $7.01 from $9.02 prior to the update.

This is somewhat misleading as UBS are yet to update their ratnig and target for the new earnings guidance, meaning their $11.70 target from a couple of months ago is now well out of the market given the average target according to the database without their number is $6.42. Thomson One Analytics had shown a median price target of $9.28.

Shares in Aristocrat today are being hit heavily despite a strong overallmarket and as at 11.50am the stock was down 16% or $1.02 at $5.06. This compares with a trading range over the past 12 months of $4.50 to $15.19.

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