Why I just bagged $3,500 of this money-printing ASX stock

Been to a pub lately? This company sells a machine that prints money for the owners.

Mitchell Lawler

Mitchell stumbled upon the concept of investing when in high school, devotedly urging his parents to put some money into a handful of technology companies with increasingly popular products among his demographic – many of which have gone on to great success. It wouldn’t be until 2017, some five years later, that Mitchell became an investor of his own money. Having studied and worked as a mechanical engineer in the building services industry, Mitchell takes a methodical and analytical approach to evaluating businesses. Rather than relying purely on numbers, Mitchell drills beyond a company’s metaphorical mantle to unearth obscure patterns or competitive advantages that would go otherwise unnoticed. His expertise resides within areas such as software, consumer goods, and building services equipment. However, his quest to find quality companies that set the industry standard and flex some degree of an impenetrable position has no limits – small cap to mega cap, cosmetics to healthcare – if it’s an exceptional business it’s on his radar.

Published June 12, 2024 1:34 pm AEST

Sometimes, the one that got away gives you a second chance. Leaping 20% during the three weeks after I named it my top ASX stock pick to buy in May, chances of adding this terrific company to my portfolio at a fair price were quickly vanishing.

See, Aristocrat Leisure Limited (ASX: ALL) released its first-half results two weeks later, and boy, was it a good one. Net profits were up nearly 17% from the prior corresponding period, the interim dividend lifted by 20%, and a further $350 million in on-market share buybacks.

Yet, the pokie machine maker's share price began retreating following the result. Between 21 May and 29 May, Aristocrat Leisure shares weakened 7.3%. On 29 May, I wasted no time, buying approximately $3,500 as a starter position in this ASX stock.

So, why did I buy Aristocrat Leisure shares?

Man sitting at poker machine celebrates a win by raising his arms straight up in the air. — Image source: Getty Images

The numbers are hard to ignore

Checking a company's fundamentals is sort of like reviewing a person's vital signs. A lot can be learned from these basic measures. The following figures are what initially caught my attention, prompting an interest in this dominant gaming business:

Free cash flow yield of 4.5%
Return on equity of 20%
Compounded revenue growth of 18.8% over the last 12 years
Compounded net earnings growth of 23.5% over the last 12 years
Net cash position of $397 million
Relatively low dividend payout ratio of 30%
Net income margin of 23.3%

The vital signs indicate a fighting-fit company. Indeed, Aristocrat Leisure is regarded as one of the best in the business. Yet, it's not supremely valued the way other quality companies are.

If I were to guess, I think the undemanding valuation boils down to a few possible reasons:

Concerns of slot machine relevancy among digital-first demographics
Staying ahead in a competitive landscape; and
Being a somewhat controversial industry

In my opinion, this ASX stock is bulldozing the first two issues. Aristocrat is involved in both old-school pokies and app-based slot machines. Secondly, many of the company's games are some of the most enjoyed pokies on the market: Dragon Link, Dollar Storm, Lightning Link, and Buffalo slots.

ASX stock still not without risk

There is the elephant in the room. Aristocrat Leisure operates in a heavily regulated industry and is exposed to scrutiny because of it.

Last year, Victoria introduced restrictions on operating hours, money limits, and spin rates. Any limitation on gaming risks Aristocrat's future growth and profitability. This is the price of admission for an ASX stock like Aristocrat Leisure.

A gold mine for AI

People often refer to Nvidia Corp (NASDAQ: NVDA) as the picks-and-shovels play to the artificial intelligence gold rush. However, I see the chip company as akin to the leaching solution that extracts the valuable gold from the raw material.

The real picks and shovels are the businesses capable of harvesting the raw material to feed into AI. Data is as good as gold to casinos because it can help inform profit-optimising decisions. As such, I think pokies will increasingly be viewed as a gateway into a treasure chest of information.

If Aristocrat can be the conduit for data capture, the added value could boost margins further. I doubt many (if any) analysts are factoring this into their long-term valuations for this ASX stock.

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