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Why the Ainsworth Game Technology Limited share price plunged 6.5%

What: Shares in Ainsworth Game Technology Limited (ASX: AGI) have plunged 6.5% after the group held its annual general meeting (AGM) yesterday.

So What: The historic performance of this global gaming and technology company is impressive. Six years ago the group had revenues of less than $70 million and no earnings. Fast forward to 30 June 2015 and revenues have soared to around $241 million with profits of $70 million. Importantly, international revenue now accounts for the majority of overall revenue.

At the AGM, management released details regarding the proposed US$38 million acquisition of Nova Technologies LLC.

The premise for the Nova acquisition is to enter a significant new market (being Class II gaming machines in the USA) that Ainsworth is currently not exposed to. Nova would add 1,300 units to the current 1,400 units Ainsworth already has in the USA and this increases the group’s overall Americas machine count to nearly 4,400 units.

Now What: The share price performance of Ainsworth and its peer Aristocrat Leisure Limited (ASX: ALL) has certainly been divergent over the past 12 months.

While Ainsworth’s share price has lost 3% (which is admittedly better than the minus 6% performance from the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO)), Aristorcat has achieved a 39% rally in its share price.

Certainly Aristocrat has been the better bet for investors over the past 12 months, however, the pricing of Ainsworth could now be appealing.

The most likely explanation for the 6.5% sell-off in Aristocrat’s shares was management’s Outlook Statement for the current financial year. The statement suggested strong revenue growth, a temporary squeeze on margins, and a similar normalised pre-tax profit to the prior year.

In financial year 2015, Ainsworth achieved earnings per share of 22 cents and paid dividends totalling 10 cents per share fully franked. With the share price last trading at $2.90 this implies a price-to-earnings ratio of just 13.2x and a yield of 3.4% which could make for an appealing entry point if the company resumes earnings growth in 2017.

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Motley Fool contributor Tim McArthur has no position in any stocks mentioned. Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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