If you fancy yourself a long-term investor, it's a good idea to pay attention when the market overreacts to an update from a quality company.
A share price dip from slightly negative or even innocuous news could provide an attractive entry point for those who are willing to ride out the short-term bumps.
One such case in point is S&P/ASX 200 Index (ASX: XJO) pokies maker Aristocrat Leisure Limited (ASX: ALL).
Last week, the ASX 200 gaming share released its 2022 financial year results and the stock instantly plunged 7%.
Morgans senior analyst Alexander Mees reckoned all this did was provide a compelling chance to buy (more) shares in Aristocrat.
Why did the market react negatively?
There were potentially some short-term points that worried the market, admitted Mees. But overall he was not concerned with the ASX 200 stock's price dip.
"Whether it was the disappointment of there being no acquisition announcements… the negative effect of higher finance costs on future estimates, or simply a reaction to FY22 earnings coming in slightly below consensus, the 5% decline in Aristocrat's share price today creates a buying opportunity," Mees said on the Morgans blog.
Aristocrat actually boosted its revenue, earnings and dividend in 2022.
"A post-COVID-19 recovery of casino capex budgets, combined with increased product penetration, drove a strong performance by Aristocrat Leisure's land-based gaming business in FY22, especially in its key US market."
The big downside was Aristocrat's digital gaming arm, but it wasn't a surprise to Mees.
"Growth in the digital gaming business, Pixel United, came to an abrupt — though expected — halt as the mobile games market normalised following the lockdown-fuelled sugar hit of the prior year."
Why is Mees keeping the faith in ASX 200 share Aristocrat?
As far as Mees is concerned, all three reasons for buying Aristocrat shares for the long term still hold:
- Long-term organic growth potential
- Strong cash conversion and return on capital employed (ROCE)
- Strong platform for investment
"Aristocrat is better capitalised than many of its competitors and has what we regard as a strong platform to continue investment in design and development," said Mees.
"[It] is a capital-light business, despite its ongoing investment in gaming operations capex and working capital. It has a high level of cash conversion and ROCE."
Mees' peers generally agree with him, with 12 out of 14 analysts currently surveyed on CMC Markets rating Aristocrat shares as a buy.
With much of its revenue coming from offshore, currency fluctuations are always a risk for the company. As is an escalation in operational or user acquisition expenses.
An example of this was when the ASX 200 share experienced disruption due to the war in Europe. According to the Australian Financial Review, Aristocrat had the largest presence in Ukraine of any Australian business.
