What is the stock?
Aristocrat Leisure Limited (ASX: ALL)
How long have you held the stock?
We have held the stock since mid-2014. It is currently one of the larger positions across the portfolios we manage.
What do you like about it?
The company has terrific momentum in its business, achieving strong earnings growth ahead of what the market has been expecting. Increasingly, it is selling its games on revenue-share arrangements rather as one-off upfront payments, and this results in a recurring and growing base of earnings, which in turn adds to forward earnings visibility. In addition, it is building out a very profitable and valuable online social gaming business.
How is it better than its competitors?
Competing in the slot machine market is largely about the product. Currently, Aristocrat is out-designing its peers with games that are very popular with its customers, including the very successful Lightening Link, and we understand it has an attractive pipeline of new products to come. These new games will also add to the games available for its online social gaming business, which is an advantage that its online peers don’t have.
What do you like about its management?
There has been a change in CEO, about which one should be cautious. However, the new CEO looks like a safe pair of hands and there is significant depth to the management team. Management is doing well by investing in the company’s future, something quite rare among listed companies. This includes approximately $200 million per annum on the design and development of new games, which adds to the product pipeline, as well as accretive acquisitions.
Where do you see the value?
The value is in reappraisal by the market of the higher quality of earnings, the very strong growth in the very profitable online social gaming business, and the optionality that comes with the potential for accretive acquisitions.
What is your target price on ALL?
We don’t have fixed price targets. The company continues to build earnings and value over time, and this is not given to a stagnant value assessment. We believe it offers very decent returns from here.
At what point would you sell it?
Once the share price gets ahead of itself in terms of what the company can achieve. However, right now, investor expectations still underappreciate what’s happening at the company, including improvements to business quality. We’ll be monitoring the business, including, for example, any sign that the product offerings are beginning to suffer, which we’ll be able to gauge from talking to customers, attending industry conferences, etc.
How much has it added (subtracted) to your overall portfolio over the last 12 months?
The stock has returned approximately 65% over the last year and has added to our portfolios helpfully. For some of our funds, it added ~250 bps towards our outperformance against the market.
Source: Yahoo!7
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