MARKETS SPECTATOR: Brokers bet Aristocrat

Credit Suisse has upgraded its recommendation on Aristocrat Leisure to outperform from underperform, as well as sharply upping its target price by 35 per cent to $3.50 from $2.95.

On the back of yesterday strong results, the broker subsequently upgraded its EBITDA forecast for the stock by 3 per cent on the prospect for share buybacks given the strong cash flow evident in yesterday's results.

"We have taken a new approach to our valuation. The upgrades to Aristocrat's ‘land-based' business increased our valuation to $3.00 per share. Additionally, we added, for the first time, a valuation placeholder of $0.50 per share ($250 million) for the prospect that Aristocrat captures value from the $US35 billion online global gaming industry,” Credit Suisse said.

"A capitalisation value of $250 million suggests Aristocrat can achieve about $30 million of EBITDA from its online initiatives during fiscal 2015 after additional $50 million of investment”.

The broker notes that the firm's acquisition of Product Madness, one of the top five social slot game operators with approximately 500,000 monthly users, has the potential for rapid growth. Although the company has yet to disclose any revenue figures or the like.

Elsewhere, UBS also viewed Aristocrat's result as strong, with the reported net profit of $91.7 million for the 12 months to September 12, beating UBS's forecasts of $88 million.

"We remain attracted to Aristocrat's operating leverage to a cyclical recovery, offering long-term earnings growth potential and favourable long-term industry fundamentals”, UBS said.



Source: Paritech Pulse

The above chart shows that since the lows of mid-2011, the stock has been slowly forming a basing pattern. Now, the upside momentum looks to be building as it is threatening to breakout through the blue resistance line on decent volumes. A decisive break would likely see the stock targeting the $4 levels in the not too distant future.