The Aristocrat Leisure Limited (ASX: ALL) share price is underperforming again on Friday after it’s disappointing profit results.
But top brokers believe the sell-off is overdone and are urging bargain hunters to use the weakness to buy the gaming machines developer.
The Aristocrat share price fell 1.7% to $25.52 – taking its two day decline to 6.7% when the S&P/ASX 200 Index (Index:^AXJO) lost 1.3% as geopolitical tensions knocked some wind out of global markets.
COVID-19 hit to profits
The sell-off in Aristocrat came as the group’s earnings missed consensus estimates. Its normalised interim net profit of $368 million was well below the $450 million that brokers were expecting.
The weakness was primarily due to its land-based business, which supplies poker machines to hotels and casinos.
The shutdown of gaming venues due to the COVID-19 pandemic more than offset the strength in its digital social gaming division.
Are Aristocrat’s shares cheap?
But UBS is unperturbed as it reiterated its “buy” recommendation on the stock with a 12-month price target of $31.80 a share.
“We remain confident in the pipeline of product and note management comments that the company has not reduced spend within R&D as a cost-saving strategy,” said the broker.
“In a month, we should know if this is a short-term surge or something more sustainable. The outcome of this has the potential to act as a significant catalyst for the share price in our view.”
Well placed for the coronavirus recovery
The bullish sentiment was echoed by Credit Suisse as it too repeated its “outperform” (or “buy”) call on the stock.
“Casino operators – opening with partial capacity – need strong game performance, assistance in moving slot machines, and flexibility in pricing models,” said Credit Suisse.
“We sense that ALL is ahead of the competition on sales and service.”
The broker also noted that Aristocrat’s digital business is performing ahead of its expectations and the group’s balance sheet is able to withstand the downturn in the global casino industry.
Not without risks
JP Morgan was equally impressed with Aristocrat’s digital division, which makes popular mobile apps but believes the downturn in the land-based business will last closer to 24 months than the six months many are expecting.
It also highlighted the risk that management may need to undertake a capital raise to help it ride out the coronavirus storm.
Nonetheless, JP Morgan still regards the stock as a buy and stuck with its “overweight” recommendation, although it lowered its price target on Aristocrat to $28.50 from $30.30 a share.
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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.
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