Something is going on with the Aristocrat Leisure Limited (ASX: ALL) share price.
Over the past two months, the S&P/ASX 200 Index (ASX: XJO) has gone down by 4.8%. Yet this ASX 200 constituent — in the perceived risky category of consumer discretionary, no less — has surged 16.7%.
In an environment of growing inflation and interest rates, why is an ASX consumer discretionary share on the rise?
Is value driving the Aristocrat share price?
The first potential driver is simple value. Aristocrat hit a 52-week low of $30.46 on 12 May. That appears to be when investors decided it was in the buy basket.
Aristocrat's 52-week high is $49.65 (reached in November). So, based on today's share price of $35.69 at the time of writing, there's about a 40% potential upside available if Aristocrat should retrace to this high.
A $500 million share buyback program currently underway has also given investors more value.
Buybacks are good for shareholders because they result in future earnings being distributed across a smaller pool of shares. Ta-dah! That's quick and easy earnings per share (EPS) growth.
And it's not a one-off either. Aristocrat is adding an on-market buyback program, on an opportunistic basis, to its existing dividend policy.
On the day of the announcement, Aristocrat CEO Trevor Croker said:
Aristocrat's exceptionally robust balance sheet and consistently strong cash flow generation enables us to reinvest in the business, retain our capacity to pursue acquisitions, and return cash via dividends and share buy-backs. We will continue to actively assess growth opportunities, including strategic acquisitions and investment in organic initiatives.
Are our bad habits supporting the share price?
Here's the truth of the matter. We mere mortals tend to keep doing certain things no matter what the economy is doing — namely smoking, drinking, and gambling.
International research shows that while we might cut back in some ways, people will consume "affordable indulgences to offset their economic woes". And gambling is part of that trend, other research shows.
That's not a recommendation, by the way.
But does this human behaviour also partly explain why the Aristocrat share price is rising?
Perhaps investors feel they can count on Aristocrat's customers to continue using their products and services more than those of other consumer discretionary businesses.
What about company news?
Aristocrat owns a portfolio of world-class poker machines and mobile games.
As we reported earlier this month, Aristocrat has been growing strongly in recent years. It's gaining market share through its pokies division and its digital business, Pixel United.
Pixel United is generating significant and increasing annual recurring revenue (ARR) from its hugely popular games.
Aristocrat is also expanding into the potentially lucrative real money gaming (RMG) market.
RMG comprises i-Gaming (tables and slots), online sports betting, and i-Lotteries.
Aristocrat says its $1.3 billion capital raising in October and continued strong business performance and cash flow "provides opportunity to invest strongly in growth initiatives, including a 'build and buy' strategy to scale in online RMG".
Aristocrat recently tried to acquire United Kingdom RMG company Playtech PLC but the deal didn't get enough shareholder support.
But Aristocrat has other RMG strategies. In a recent presentation, the company outlined how it will go about its goal "to be the leading gaming platform for the global online RMG industry".
What are the experts saying about the Aristocrat share price?
As my Fool colleague James reported yesterday, top broker Morgans has an add rating on Aristocrat shares with a price target of $43.
The broker said:
It has delivered revenue growth of 17% pa over the past five years and 80% of revenue in FY21 was recurring. We expect ALL to continue to take market share in all its product segments.
Demand for its gaming machines and digital games is resilient to economic cycles. […] With $3.3bn of currently available liquidity, ALL has significant funding capacity for growth, even after the buyback.
Last week, we reported that Citi has a buy rating on Aristocrat shares with a price target of $41.
