The Aristocrat Leisure Limited (ASX: ALL) share price is outperforming the market today as it finds a sweet spot between value and growth.
Such ASX shares aren’t easy to find in the current market with value shares outperforming growth shares.
The Aristocrat share price jumped 4.2% to $32.56 during lunch time trade – making it one of the top performing stocks on the S&P/ASX 200 Index (Index:^AXJO).
ASX growth vs. value battle rages
Growth shares used to be the market darlings in a near zero interest rate environment. You only need to look at how the Afterpay Ltd (ASX: APT) share price and Zip Co Ltd (ASX: Z1P) share price performed in the last year to see what I mean.
But the tables are turning as the market focuses on rising bond yields and the prospect of higher rates.
The ASX share market is at an inflection point as experts debate if now is the time to switch from growth to value.
Aristocrat share price gets best of both worlds
This tussle puts the Aristocrat share price in an advantageous position with Morgan Stanley initiating coverage on the gaming machine market with an “overweight” recommendation.
The broker’s bullish view on the Aristocrat share price is driven by the group’s strong growth potential and very reasonable valuation.
It fits nicely into the “GARP” (growth at a reasonable price) category, in my view. And I believe GARP stocks are among the best placed to outperform the broader market over the next 12-months.
Growth drivers for the Aristocrat share price
The fact that Aristocrat’s balance sheet is stronger than its rivals bodes well for its ability to grow and invest in innovative games.
“This leaves ALL best placed to continue to outperform peers and gain market share in participation gaming, and strengthen its competitive position and the durability (and hence value) of its earnings, in our view,” said Morgan Stanley.
Another growth driver for the group is its digital gaming division. Aristocrat developed a number of apps for mobile phones that have proven to be a hit with consumers.
“We think ALL’s Digital business deserves a 18x FY22 EV/EBIT multiple, at the top end of mobile gaming peers,” added the broker.
“Post COVID-19 we expect ALL to emerge in a net cash position in FY23 with ~A$1.9bn of debt capacity to deploy by FY22.”
This means Aristocrat has a significant war chest to invest in its businesses and/or make bolt-on acquisitions.
What is Aristocrat share price worth?
Morgan Stanley believes the Aristocrat share price is too cheap and isn’t reflective of its growth potential. The ASX share is trading on an expected circa 20 times price-earnings (based on FY22 forecasts).
That puts the Aristocrat share price at around a 20% plus discount to the ASX 200.
The broker’s price target on the stock is $38.