The Aristocrat Leisure Limited (ASX: ALL) share price has started the week in a very positive fashion.
In afternoon trade the gaming technology company's shares are up 10% to $22.20.
Why is the Aristocrat Leisure share price rocketing higher?
Investors have been fighting to get hold of the company's shares this afternoon following the release of a broker note out of Goldman Sachs.
According to the note, the broker has upgraded Aristocrat Leisure's shares to a buy rating with a $29.00 price target.
Even after today's stellar gain, this price target implies potential upside of almost 31% over the next 12 months.
Why did Goldman upgrade Aristocrat Leisure?
Although the broker notes that there is significant near-term earnings uncertainty in its land-based businesses from global casino closures, it believes the selloff of its shares has been severely overdone.
It notes that prior to today, its shares were down 48% since February 20 compared to a 34% decline by the S&P/ASX 200 Index (ASX: XJO).
It feels this is unjustified. Especially given how the company's Digital business could benefit greatly from global shutdowns.
Furthermore, Goldman Sachs believes Aristocrat will emerge from the coronavirus crisis in a materially stronger competitive position.
It explained: "With a key risk for ALL having been the recent increased focus on gaming from its key competitors IGT/SGMS, these two business are in our view far more exposed to the COVID-19 impact, given: (1) materially more leverage balance sheet gearing; (2) less digital exposure; (3) exposure to Italian Lotteries."
"Hence, with ALL able to continue investing in R&D and its staff through this difficult period, we believe it will emerge from the COVID-19 outbreak in a materially stronger competitive position than it is currently in," it added.
And while the broker expects Aristocrat Leisure's earnings to take a hit in FY 2020 from the outbreak, it expects only a small impact in FY 2021.
The broker has pencilled in earnings per share of $1.59 in FY 2021. This means its shares are changing hands at a little under 14x FY 2021 earnings. This is materially lower than its 10-year average.
I think Goldman Sachs is spot on and feel Aristocrat Leisure would be a good long-term option for investors.
Incidentally, the broker also upgraded Afterpay Ltd (ASX: APT) shares to a buy rating on Monday. It has a $25.20 price target on the payments company's shares.
