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Aristocrat Leisure Limited could be a big winner from the falling Australian dollar

Investors of Aristocrat Leisure Limited (ASX: ALL) have had a fantastic 12 months with its shares providing a whopping 46% return, and economic events in 2016 could help keep this run going.

Much like companies such as CSL Limited (ASX: CSL), ResMed Inc. (CHESS) (ASX: RMD), and Westfield Corp Ltd (ASX: WFD), Aristocrat Leisure has benefitted tremendously from the weaker Australian dollar.

Approximately 62 percent of the company’s revenue comes from the Americas segment. While this segment does also include South America, it contributes less than 6 percent to the segment’s overall revenue, meaning the company has significant exposure to the US dollar.

In fact, as of the annual report in December the company estimated that each one cent change in the USD:AUD exchange rate would result in an estimated $3 million translational impact on the company’s annual profit after tax.

Over in the United States the Federal Open Market Committee is meeting on Wednesday to discuss interest rates once again. Most market commentators believe there will be no change to interest rates at this meeting, but agree that the meeting in March is the most likely time for interest rates to be increased. Still, surprises do happen and the US economy is looking a bit better so there is always a small chance something could occur this week.

When rates are eventually increased again in the United States the Australian dollar is expected to weaken against its US counterpart. Some analysts believe that the Australian dollar could decline so far as 65 US cents this year, which would be a real boost to the bottom line of Aristocrat Leisure.

Furthermore, the very opposite could happen on home soil this year. Analysts believe the chances of a rate cut to 1.75 percent at the Reserve Bank’s June 2016 board meeting have become very high. The divergence in monetary policy could go some way to reinforcing the Australian dollar’s predicted decline.

It is worth noting that should the Australian dollar strengthen unexpectedly against the US dollar then it could cause an adverse effect on the company’s earnings and subsequently its share price. I believe it would be prudent for investors of Aristocrat Leisure to keep a close eye on the exchange rate when holding the company’s shares.

Because of the weaker Australian dollar and the excellent growth we are seeing in its Americas segment, analysts are expecting Aristocrat Leisure to post earnings per share of 47.8 cents for fiscal 2016. This is a massive increase of 59 percent from fiscal 2015’s earnings per share of 30.1 cents.

Foolish takeaway

Whilst I do expect earnings growth to slow to a steady level in fiscal 2017 and 2018, the shares should continue to offer shareholders great returns for the next couple of years, making Aristocrat Leisure a worthy addition to your portfolio.

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Motley Fool contributor James Mickleboro 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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