Aristocrat remains the no.1 gaming machine/gaming software play anywhere in the world. It just happens to be listed in Australia. Recently ALL shares have pulled back around -13%, due mainly to the so called “great rotation” from growth stocks to value stocks. In this pullback I see investment opportunity and the AIM Global High Conviction Fund has increased its weighting in ALL feeling the upcoming full year results and outlook commentary will remind the market that ALL is a structural growth stock that deserves a structural growth stock premium.

The reasons for the -13% pullback are well known, but unlikely to be sustained. Investors have been taking profits all around the world in stocks that have performed well this year, particularly stocks with higher P/Es than the market. ALL’s competitors Ainsworth Game Technology (AGI) in Australia and International Game Technology (IGT) in the US both have issued weak earnings outlooks. Finally, the long serving ALL CEO Jamie Odell announced his retirement set for 28 February 2017.

I’m of the view this is a classic situation of “sell the rumour, buy the fact”. The “fact” being ALL’s full year earnings result on Wednesday the 30 November, which will confirm that this company is taking share from its competitors, growing earnings and free cash, and highly deserving of a P/E premium to its peers and the ASX200.

If anything, I believe ALL can deliver earnings 5-7% above current guidance. That would be 3% above current market consensus, as analysts are generally slightly above the last guidance given by ALL. That earnings surprise view is driven by our strong belief in North American momentum (62% of the business) and ongoing strength in Australia.

In Australia, every publican we speak to is spending more on ALL machines/software. It’s that simple because the ALL machines draw in more players and generate better returns to the pub owner. Pub owners are prepared to pay more for ALL machines. We believe ALL is becoming even more dominant in Australia and that partly explains the AGI profit warning.

For example, the flagship “Lightning Link” product is still performing at 2.8x floor average…only 9% of the installed base but 25% of venue profit…transitioning to a higher quality, recurring daily payment model.

In the US, the recent Eilers Fantini North American slot survey indicated a strong September quarter 2016 for ALL in regards to outright sales and participation installs. ALL’s momentum in the US can partly explain the weakness in IGT numbers.

Depending on how ALL chooses to account for current and future sales, the FY16 NPAT number could creep above $400m. It was $183m in the 1H of FY16. Give or take $10m at the FY16 headlines NPAT level, that implies around +65% year-on-year growth.

That +65% year-on-year growth is driven by Australian and NZ growth in shipments and average selling price rising +64% and +10% respectively. North American Class 3 participation installs of 3405 vs 737 in the pcp, and +10% growth in average fee per unit (US$55 per day). VGT acquisition being incorporated for the full 12 months with +4% growth in net installs (905) and +10% growth in average daily fee per unit ($41 per day). We also feel Digital will show strong growth in daily active users (DAU) to 350,000 and average revenue per daily active user (ARPDAU) to 42c per day.

We also believe the quality of ALL’s earnings has significantly improved. In previous times, ALL’s “cyclicality” caused havoc for analysts in predicting earnings. But today around 60% of ALL’s earnings are reoccurring (participation machines/social gaming). These are much stickier and forecastable earnings streams.

ALL is firing on all cylinders and is increasing its percentage of annuity income.

Then I look forward to FY17 and the outlook for ALL is strong yet the investment arithmetic is undemanding.

ALL should be able to grow earnings by another +20% in FY17, driven by further growth in all of the segments above. What’s also important in FY17 is that ALL’s strong free cash generation is leading to rapid debt repayment which is lowering overall interest costs. Net interest costs should drop by -$15m in FY17, as ALL’s net debt falls by around $400m to $670m.

There’s just so much to like about ALL but the key points are market share gains, new products, recurring income and increasing product prices and profit margins. This is a classic structural grower in a structural growth sector and I do not believe that structural growth will alter under a change of CEO.

As the highly regarded Citi analyst Rohan Sundram wrote “CEO Jamie Odell will step down after almost eight years at the helm, to be replaced by long-serving senior executive Trevor Croker (commenced in July 2009 as MD of Australia/NZ but more recently has taken on global product portfolio responsibilities), we view this transition as low risk in nature given a strong internal successor who is well-known and regarded by the market and given ALL’s key design and development team remains intact. ALL’s CEO change transition comes as no major surprise, given Odell’s long and productive tenure and given management has been referring to its “bench strength” for some time in its dealings with the investment community”.

I tend to agree with that view believing the key to ALL is producing a better product than anyone else and charging more for it. Either way, it appears a relatively low risk transition to a highly qualified internal CEO candidate.

If we are proven right about ALL growing EPS another +20% in FY17, then there is absolutely no doubt that ALL is a structural growth at a reasonable price equity. In fact, for the undoubted world leader in its sector, it is cheap.

Assuming ALL can generate FY17 EPS of 75c, then at $15.00 the stock is on 20x and offering +20% EPS growth. That would be a price to growth ratio (PEG) of 1x. Free cashflow yield would be over 6% and dividend yield rising to 2.1%. It’s worth remembering structural growth stocks generally yield less than the market but grow earnings at multiples of the market.

I believe the recent pullback in ALL shares is an opportunity for investors with more than a one-minute view. Structural growth stocks continue to deliver structural growth and that is why they tend to outperform broader markets over the medium term. ALL is very well positioned to continue to deliver structural earnings and dividend growth to shareholders.

My final point is I highly doubt that President Trump is anti-casinos…

Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.