Shares in poker machine maker Light & Wonder Inc (ASX: LNW) have been on a downward trajectory for much of the past year, but analysts now believe the shares are looking very cheap and represent a chance to make some serious gains.
One of the issues affecting the stock is a pending court case brought against the company by its $40.6 billion competitor, Aristocrat Leisure Ltd (ASX: ALL), which has alleged the smaller company has breached Aristocrat's trade secrets and poached game developers in a bid to develop the game, Dragon Train.
Aristocrat's lawyers are arguing that the game has similar game elements based on the underlying game mathematics to its own games, and also argue that the game was designed by a former Aristocrat game designer.
Light & Wonder, whose executive chair is former Aristocrat executive Jamie Odell, is denying the claims.
Image source: Getty Images
Fundamentals looking good
Jarden analysts have run the ruler over Light & Wonder, and even factoring in a hefty theoretical settlement over the lawsuit, like what they see.
As the Jarden team write in their research note this week:
Light and Wonder is a high cash-generative business and the natural path to de-lever quickly remains clear. We view current balance sheet constraints (+ ongoing litigation) as temporary headwinds, remaining confident in the outlook for Light & Wonder longer-term.
Jarden analysts are expecting the company's net debt to reduce from $4.71 billion this year to $2.47 billion by FY29, and that is factoring in a hypothetical US$200 million ($305 million) settlement of the legal action.
The Jarden team is also expecting the company to buy back about US$920 million ($1.4 billion) of its own stock through the company's current financial year.
They also expect the company to report year on year earnings growth for its third quarter of 14%, to US$363 million ($553.6 million).
Shares looking cheap
Jarden has a price target of $180 on Light & Wonder shares compared with the current share price of $115.80.
Should this be realised, investors would make a hefty 55.4% gain over 12 months. The company does not pay dividends.
Macquarie is also positive on Light & Wonder shares, with a recently-released price target of $180 also, and an outperform rating.
Light & Wonder is scheduled to release its third quarter results on 6 November.
The Jarden team this week raised their rating on Aristocrat Leisure from a neutral to a buy recommendation, and have a price target on that stock of $75, against $66.25 on Tuesday.
