The share price of Aristocrat Leisure Limited (ASX: ALL) jumped to a fresh 10-year high this morning as brokers rushed to upgrade their earnings forecasts on the gaming machine developer following its strong profit result yesterday.
The stock surged a further 5.2% to $31.63 in early trade after climbing 4% on Thursday when management posted a one-third increase in interim revenue to $1.6 billion and a 29% uplift in earnings before interest, tax, depreciation and amortisation (EBITDA) to $642.9 million.
The outperformance of the stock stands in contrast to the S&P/ASX 200 (Index:^AXJO) (ASX:XJO), which is struggling to break into the black this morning.
The better than consensus numbers prompted Credit Suisse to upgrade its recommendation on the stock to “outperform” from “neutral” and lifted its price target by $7 a share to $35.
It’s gaming machines business contributed to the strong result but its Aristocrat’s social gaming digital division that delivered the winning hand and should dispel worries about the company’s acquisitions to expand into the online market.
“We take the view that ALL’s above expectation performance in Digital will catch the eye of new investors who envision ALL scoping out a much larger position in the US$50 billion mobile digital games industry (which today ALL has less than 2% market share),” said the broker.
“We see low earnings risk to near-term momentum, whether this Digital step-up occurs or not. Potent cash generation should drive down debt rapidly.”
It isn’t only Credit Suisse that has been wow-ed by Aristocrat. Morgans reiterated its “add” recommendation on the stock and upped its price target to $33.57 from $30.41 a share.
“Strong game performance resulted in a 19.5% increase in the installed Class III gaming operations based in North America,” said Morgans.
“Recent casino feedback suggests that we should see further impressive growth in this area given existing titles are currently performing at multiples of the floor average, and new titles are expected.”
What this means is that Aristocrat is firing on all cylinders. Its gaming machines business continues to take market share in the US and that should silence sceptics who are worried about a loss of growth momentum for its land-based business.
Meanwhile, Deutsche Bank described the results as “extremely positive”. Not only has Aristocrat produced consensus-busting results for its Digital and Class III operations, it is also enjoying early success in expanding into adjacent markets.
The broker increased its price target on the stock to $38.75 a share and reiterated its “buy” call on the stock.
It’s not only Aristocrat that produced better than expected earnings this month. Building materials suppliers James Hardie Industries plc (ASX: JHX) and CSR Limited (ASX: CSR) has also managed to pleasantly surprise analysts, although not to the same extend as Aristocrat.
Next week will see laboratory testing group ALS Ltd (ASX: ALQ) hand in its full year results. I am expecting good things from the company as the strong recovery in mining exploration activity should deliver a nice tailwind to its earnings.
Looking for other stocks that can outperform this year? The experts at the Motley Fool are tipping these three blue-chip heroes for 2018.
Follow the free link below to find out what these stocks are and why they should be on your watchlist.
For many, blue chip stocks mean stability, profitability and regular dividends, often fully franked..
But knowing which blue chips to buy, and when, can be fraught with danger.
The Motley Fool’s in-house analyst team has poured over thousands of hours worth of proprietary research to bring you the names of "The Motley Fool’s Top 3 Blue Chip Stocks for 2018."
Each one pays a fully franked dividend. Each one has not only grown its profits, but has also grown its dividend. One increased it by a whopping 33%, while another trades on a grossed up (fully franked) dividend yield of almost 7%.
The names of these Top 3 ASX Blue Chips are included in this specially prepared free report. But you will have to hurry. Depending on demand – and how quickly the share prices of these companies moves – we may be forced to remove this report.
Click here to claim your free report.
Motley Fool contributor Brendon Lau owns shares of Aristocrat Leisure Ltd. 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 Scott Phillips.