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Why Aristocrat Leisure Limited is outperforming the market

Aristocrat Leisure Limited (ASX: ALL) has been one of the best performing large caps over the last 12 months with the gaming company’s share price rising 37% compared to the 4% increase of the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO).

Most of the share price appreciation has occurred over the last several months after Aristocrat posted an impressive full year result in late November and announced the US$990 million acquisition of social gaming company Big Fish Games.

A different Aristocrat

The 2017 digital gaming acquisitions of Big Fish and Plarium will diversify Aristocrat’s business with the digital component comprising 38% of pro forma revenues as at 30 September 2017. The majority of the business still consists of the company’s traditional strength in poker machines via outright machine sales and gaming operations.

The move by Aristocrat’s management towards mobile gaming is underpinned by the fast growth in mobile gaming that is outpacing the traditionally dominant segments of PC and console gaming. Looking forward, gaming market intelligence firm Newzoo projects mobile gaming to grow at a compound annual growth rate of 13% over 2017-2020, which is higher than the 7% growth forecast for the overall gaming industry over the same period.

American gains

A recent Slot Managers Survey conducted by Goldman Sachs indicated that Aristocrat is continuing to gain market share in the Americas with company’s Lightning Link being the most anticipated game in the history of the survey. The Americas region is the company’s largest and most profitable arm of the poker machines business and was the main contributor to net profit after tax and before amortisation of acquired intangibles rising 36% to $543 million in FY17.

In FY17, segment profit in the Americas grew by 26% to US$560 million. In North America, the top line was boosted by an increase in the number of gaming units sold in conjunction with higher average selling prices. The company’s gaming operations also performed well with a 10% rise in total units and a 5% increase in average daily gaming operations revenue.

Foolish takeaway

Aristocrat trades for around 26 times consensus forward earnings which is a reasonable valuation premium given the company’s track record of growing the business and its future growth prospects.

The company continues to outperform other gaming companies such as Crown Resorts Ltd (ASX:CWN) and Star Entertainment Group Ltd (ASX:SGR). Aristocrat’s competitor, Ainsworth Game Technology Limited (ASX:AGI) has seen its share price fall 38% since last Friday after the company released a trading update revealing its profit outlook is considerably below prior expectations.

For Aristocrat, attention will now turn towards the release of its half year earnings report on May 24 to see if the company can deliver on the bullishness priced into the stock.

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Motley Fool contributor Tim Katavic owns shares of Aristocrat Leisure Limited. The Motley Fool Australia owns shares of and has recommended Crown Resorts Limited. 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 Scott Phillips.

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