Playing with Aristocrat
Recommendation
One high PER company which we did maintain a positive recommendation on was gaming machine manufacturer Aristocrat. But the share price has taken a 21% tumble since our last full review in issue 98/Mar 02 (Long Term Buy - $5.94) and it's appropriate to ask whether our initial view is still correct.
As we suggest in our review of Tab and TAB Queensland on page 4, gambling, like cigarettes and alcohol, is pretty close to being a perfect business. Punters are hooked on the product, the companies are perennial cash cows and the hand of government is just about the only thing standing between them and even more profits.
With a 65% market share Aristocrat dominates the Australian gaming machine market. Punters may have heard of popular games like Queen of the Nile and Golden Pyramids, both made by Aristocrat. But growing concerns over the social cost of 'pokies' is slowly gutting Aristocrat's growth in Australia.
Local saturation
In fact, the poker machine market is approaching saturation point and machine replacement and servicing isn't enough for an ambitious company like this one. That's why US operations boss Mark Newburg is targeting a hefty 20% market share of all new gaming machines sold there this quarter.
His promises are riding on the back of Aristocrat's much touted Oasis management system which enables operators to link and monitor all their casino, hotel, food and beverage divisions. Newburg could well fall short of his target in the short term but the potential is huge nevertheless.
Aristocrat has a reputation for making optimistic earnings forecasts, although more recently Newburg's earlier enthusiasm has been doused by talk of 'challenging' profit and market share targets. That's the primary reason for the share price fall.
So, is this an opportunity to get in cheap? Well, not really. Usually, we'd upgrade our recommendation in the face of such a price fall but this is one of those rare occasions when we're downgrading. But not because of any problems with Aristocrat.
Whilst not cheap the business continues to grow. For example, it recently won the contract for the new Tuscany Hotel and Casino in Las Vegas, the city's first cashless casino.
No, our reasoning is that with price falls elsewhere in the market, there are now more attractive opportunities than this one. Aristocrat's PER of 24 and paltry dividend yield of 2.5% hardly compares with, say, Miller's Retail's PER of 14 and yield of 4.4%. Even Macquarie Bank is trading on a PER much the same as the big four banks and offers a yield of 4.2%.
What if you've already bought in? Well, as we've said in the past, this stock is really only suitable for higher risk investors and if you're of that ilk, comfortable with Aristocrat's high growth tag and don't need the income, HOLD FOR THE UPSIDE.