Gaming is big business these days, and new product offerings in the form of poker machine releases are hotly anticipated and showcased at the Global Gaming Expo, not surprisingly held in Las Vegas each year.
This year's event was held in early October, and the team at E&P Capital have looked at the feedback coming out of the event ahead of both Aristocrat Leisure Ltd (ASX: ALL) and competitor Light & Wonder Inc (ASX: LNW) reporting profit results in the near future.
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Dominant position upheld
Aristocrat, which has a market value of $38.9 billion, is a global leader in the poker machine field, and according to E&P Capital, demonstrated a strong pipeline at the Expo, known as G2E.
Feedback from G2E was reasonably positive for Aristocrat, and they were generally deemed the strongest vendor. Aristocrat expanded on their existing franchises well and the Baron cabinet appears to have plenty more runway with the portfolio of available games. We also observed that there was nothing new that 'wowed' casino floor managers, implying that Dragon Link is likely to retain its crown as the industry's dominant game.
E&P Capital said feedback from G2E was also positive for Light & Wonder, noting that it was being aggressive in its pursuit of its bigger rival.
Most attendees rated them a close number two to Aristocrat, with the gap closing every year. They were also viewed favourably for taking a greater number of risks than Aristocrat.
Litigation pending
There was, however, a caveat on Light & Wonder, which has been taken to court by Aristocrat over the development of the Dragon Train game, which Aristocrat has alleged, among other things, infringes its intellectual property.
A recent court ruling granted Aristocrat the right to "obtain discovery of math models" from Light & Wonder, which E&P Capital says is a negative for the company.
We believe the recent judge's ruling over game math and the other ongoing disputes have increased the downside risk for Light & Wonder. As such, we have factored in a higher fine and increased our cost of equity.
So which shares are a better buy at the moment?
E&P Capital has a bullish price target on both stocks, but Light & Wonder is streets ahead, at least based on where the broker says its shares should be trading on a valuation basis.
It values Aristocrat at $73.46 per share, 16.5% higher than Tuesday's closing price of $63.05, while its valuation of Light & Wonder shares comes in at $163, 40.5% higher than Tuesday's closing price of $116.
And as recently reported, Jarden analysts have a similar bias towards Light & Wonder.
