What is the stock?
Aristocrat Leisure (ALL: ASX).
How long have you held the stock?
What do you like about it?
Aristocrat has a portfolio of very highly regarded electronic gaming machines in an industry with significant barriers to entry. Over the last six years, the company has diversified beyond gaming machines, with its expansion into the online and now the mobile gaming market.
How is it better than its competitors?
ALL is a leading provider of gaming solutions and manufactures gaming machines for over 240 gaming jurisdictions around the world, continuing to increase its exposure to the US$138 billion games market, which has grown at double digits rates for over a decade.
Over the last 60 years, it has accumulated a portfolio of licences to manufacture gaming machines, a broad suite of products and strong intellectual property. Management continues to diversify the revenue stream and a strong presence in the Asian markets provides additional long-term growth opportunities.
What do you like about its management?
After struggling through the GFC, the businesses turned to Jamie Odell, who led the business continuously until 2017. Current CEO Trevor Croker worked closely with Odell throughout that transformational period and looks set to continue with the successful strategy developed over that period.
What is the target price?
$30 and the current price is $23.05.
At what point would you sell it?
The company recently underwhelmed the market with slower-than-expected growth in its digital prospects. Growth is still very strong, however we will be monitoring closely to ensure the slowdown doesn’t accelerate. A loss in market share rather than market share gains in the digital space would also be a red flag.
Where do you see value?
Of particular interest are the estimated sizes of the two markets that Aristocrat is targeting, with social casino market estimated at $4.5 billion, and the social gaming market estimated at $45.9 billion. The increase in scale is key to capturing a large portion of this market, which has high levels of recurring revenue. Since 2014, the company has increased the amount of recurring revenue from 24% in 2014, to 65% in 2017. In addition, the US market now accounts for 75% of the company’s earnings.
With a broad suite of products and strong intellectual property in a market with high barriers to entry, we believe an opportunity arises for investors to top up on ALL or take a position in a company with bright prospects.
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