Aristocrat Leisure Limited and Echo Entertainment Group Ltd: Are they worth a wager?

Within the last week, two gaming stocks hit new 52-week highs, but does this signal some kind of revival in the casino and gaming industry? As consumer discretionary stocks, they rise and fall depending upon whether consumers have a lot of extra income to use on leisure and entertainment.

Currently conditions aren’t the best with a tighter Federal budget being hammered out and consumer sentiment showing but a small improvement of late. However, before things really pick up, it may be worth seeing what these two companies are doing and why their outlook may be improving.

—  Echo Entertainment Group Ltd (ASX: EGP)

The operator of the Star Casino in Sydney has had a topsy-turvy year since May 2013 when Crown Resorts Ltd (ASX: CWN) divested its ownership and began the steps of applying for a gambling license for a new proposed casino in Sydney. Echo Entertainment’s shares immediately dropped and trailed down to as low as $2.20.

Since February 2014, it’s up about 48%, hitting a new high of $3.30 last week. It has shown some improvement in revenue and a new CEO, Matt Bekier, is attempting to steer the company on a new growth path. It has also joined with a Chinese development company to win approval for building a new casino in Brisbane, where it currently operates the only casino in the city. It is competing for the project against Crown Resorts, which wants to break open the Brisbane market as well.

A final decision naming the project winner is expected in early 2015. If Echo can win this one, it can maintain its exclusive business there, but it will also have to shoulder part of the projected $1 billion development cost with its consortium members.

—  Aristocrat Leisure Limited (ASX: ALL)

The gaming machine producer has the largest market share of the gaming machine industry in Australia as well as in Asia. It is famous for its poker machines and other automated games, yet recently has moved into social gaming, as it sees many new and potential customers are enjoying games online, especially on mobile devices.

In late 2012, it bought US-based Product Madness, which makes games for websites such as Facebook. These are free games with no wagering, but players can buy extra things for the gameplay. If in the future online gambling laws change in the US, Aristocrat will be in a good position for it.

This month, it announced another acquisition which is projected to triple its North American gaming segment. It will purchase Video Gaming Technologies for about US$1.28 billion.

CEO Jamie Odell stated: “This combination also offers exciting growth opportunities for VGT by leveraging premium Aristocrat games and systems products, as well as national distribution opportunities for VGT’s Class II products.

The strong accretion and free cash flows expected from this transaction will not only transform the scale of our gaming operations business today, but will also preserve Aristocrat’s options to pursue acquisitions in the future in key growth segments – including digital.”

A better alternative

Of these two, I prefer Aristocrat Leisure. It is the market leader in its industry and taking advantage of the growth of internet technology to expand its business even more around the world, as well as making acquisitions to broaden its gaming footprint in casinos. Echo Entertainment has recovered nicely in share price, but how will it grow its business over the next 5-10 years? Aristocrat is a stronger growth candidate right now in my eyes.

However, there's one more company that could be an even better buy. This small-cap ASX stock offers a 7% grossed-up dividend yield and strong track record for growth.

You can get its name and code of this ultra-promising stock for FREE! Just click here to download your free copy of "The Motley Fool's Top Dividend Stock for 2014-2015" today.

Motley Fool contributor Darryl Daté-Shappard does not own shares in any company mentioned. 

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