Growth stock Aristocrat Leisure Limited looks a buy at current prices

Aristocrat Leisure Limited (ASX: ALL) reinforced its status as one of the top performing growth stocks on the ASX, recently announcing higher revenue and earnings across all four of its business segments. Impressively, the company also increased group profit margins for the full year reporting period to 30 September 2017.

Digital is by far Aristocrat’s fastest growing segment; increasing revenue and segment profit during the period by 41.2% and 38.8% respectively.

Reported digital revenue was $395 million to 30 September 2017, though segment revenue will increase to more than $1 billion once full-year contributions from recent acquisitions are included.

Aristocrat announced on 20 October it had finalised the acquisition of Israeli-based social gaming company Plarium Global Limited and stated the business would be earnings before amortisation accretive in year one.

Then on 30 November, Aristocrat informed the market it had entered into a binding agreement to acquire 100% of Big Fish Games Inc for USD$990 million, which will predominantly be funded by debt. Like Plarium, Aristocrat expects Big Fish to generate positive earnings before amortisation in the first full year of ownership.

These acquisitions are a significant investment in what is a growth market and will transform the company from what was traditionally a “pokie-machine” developer into the second-largest Social Casino publisher globally.

Big Fish is headquartered in Seattle and is set to further increase Aristocrat’s US dollar revenues, after Aristocrat stated the acquisition generated an adjusted USD$458 million in revenue for the 12 months ending 30 September 2017.

US earnings are an important factor when valuing Aristocrat, as the high Australian dollar decreased reported revenue by $60 million for the period, while earnings before amortisation was reduced by $15.7 million.

Since September, when the Aussie dollar was buying more than USD$0.805, our currency has fallen approximately 6% and is trending towards USD$0.750.

Aristocrat has stated that a 1 cent movement in the USD:AUD exchange rate results in an approximate $6 million impact on the group’s profit after tax before amortisation. Expected interest rate rises in the United States should increase the value of their currency relative to ours, especially given Australia looks set to continue with record low interest rates for some time.

Another external factor that could raise the value of Aristocrat shares is the strong likelihood of lower corporate tax rates in the United States. Aristocrat’s North America business segment generated USD$1,033.7 million in revenue, representing 58% of the group’s total, and the company’s most recent effective tax rate was 32%.

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Motley Fool contributor Ian Crane has no financial interest in any company mentioned. 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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