Treasure Chest: Could Aristocrat See $30?

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

Aristocrat’s share price has gone parabolic in the last couple of years but having now passed $20, could $30 be achievable?

– Shares are up 50% year to date
– Momentum remains solid
– Buy ratings dominate

By Greg Peel

In the year to date, the share price of Aristocrat Leisure ((ALL)) has risen 50%. A bit over a year ago, brokers were not quite so keen on the stock, particularly given the Aussie was on the retreat and the gaming machine company derives a large proportion of earnings in the US.

Said one major house last April:

“Growth is expected to slow significantly in FY17 and FY18 relative to the last two years.”

It is easy to highlight in retrospect that this expectation could not be more wrong if it tried. I won’t single out the broker nevertheless, given every major broker, including those more upbeat on Aristocrat back then, were blown away by the company’s first half FY16 result. A scramble to reassess forecasts followed.

And brokers were again blown away by the company’s first half FY17 result. The share price is up 50% year to date, and 137% from April last year. In April this year, Aristocrat passed $20 for the first time. Following the result, the FNArena consensus target jumped from under $20 to over $24.

With nothing seemingly holding the gaming company back, Goldman Sachs now asks the question, could the share price go to $30? Goldman is not an FNArena database broker, and database targets range from $23.00 (Ord Minnett) to $26.85 (Deutsche Bank).

To test the possibility Goldman has reviewed its discounted cash flow valuation for Aristocrat and where its terminal year (the furthest out forecast year) assumptions sit for key business units compared to FY17 estimates. Four key units have the greatest potential to exceed forecasts, the broker believes, so how would it all add up if these forecasts were stretched?

The conclusion is $30 is achievable on forecasts that are high, but not necessarily unrealistic, given current momentum across the businesses and potential for organic growth via adjacent product lines. Goldman sees the digital and Class II video product lines as having most upside potential given Aristocrat’s content and market position.

The broker has subsequently lifted its FY17-19 earnings forecasts and its twelve-month target to $25.00 from $22.50 prior, retaining a Buy rating.

One might have expected a 50% share price jump in six months to prompt brokers into pulling back their Buy ratings to at least Hold despite the strong first half result, on pure valuation terms. But no. Of the six FNArena database brokers covering the stock, only one (Credit Suisse) has a Hold rating (Neutral) while the other five maintain Buy or equivalent ratings.

Game on.

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