One Australian manufacturing firm that is maintaining its business is Aristocrat Leisure, which makes slot machines, gaming systems and accessories. The company’s first half earnings forecast, suggests full year earnings are heading towards growth of 10-15%. The question is: how will gambling fare in recessionary times? Not all that well, if global casino capital expenditure is any indicator; it is leading to lower demand for gaming machines.
Aristocrat is looking for earnings growth from game releases in Australia, North America and Japan. The company is globalised, and currency movements remain a risk with 75% of operating revenue coming from businesses operating in the Americas, Japan, South-East Asia, Europe, Africa and New Zealand. But with the $A probably having peaked and with significant geographical diversification providing some natural hedging, the risk is probably contained.
Analysts are reasonably positive. UBS sees value, despite downgrading its earnings per share estimates. It has a buy and a price target of $3.15:
“Despite today’s setback we have retained our Buy rating on valuation grounds (c30% upside to our DCF), however we remain attracted to ALL’s significant operating leverage to a cyclical recovery, offering long term earnings growth potential and favourable long term industry fundamentals (i.e. strong industry dynamics and market positions in an industry with relatively high barriers to entry). Current pricing implies a 9.8x mid-cycle P/E based on our estimates.”
JPMorgan has a neutral recommendation but, oddly, a higher price taregt of $3.50. It sees the stock as a medium term play:
ALL remains a longer term play on the slot machine replacement cycle in the US and Australia, with significant operating leverage from a depressed earnings base. However, it will take time for the earnings to grow to meet the share price. The guidance update is likely to further slow the rate of earnings recovery in the market’s mind, restricting performance. Having said this, the share price reaction to management’s announcement appears aggressive, with management’s full year expectations largely unaffected. Also, the stock has now fallen back more in line with compco valuations.
Deutsche has upgraded from sell to hold, but has a much lower price target of $2.50. It is quite a range of opinions:
The company did not provide details as to trading conditions but reiterated strong NPAT growth over the 12 mths to September and December. The stock is trading at a 10% premium to North American peers on a 2012E EBIT multiple basis.
The fundamentals do not look especially compelling, with a forward dividend yield of 4.1%, unfranked, and a forward earnings multiple of 15.4 times. But given that it is a globalised company, it does offer some international exposure.