Aristocrat Leisure Limited’s (ASX:ALL) Prospects Need A Boost To Lift Shares

Aristocrat Leisure Limited’s (ASX:ALL) price-to-earnings (or “P/E”) ratio of 11.2x might make it look like a buy right now compared to the market in Australia, where around half of the companies have P/E ratios above 20x and even P/E’s above 39x are quite common. However, the P/E might be low for a reason and it requires further investigation to determine if it’s justified.

With its earnings growth in positive territory compared to the declining earnings of most other companies, Aristocrat Leisure has been doing quite well of late. It might be that many expect the strong earnings performance to degrade substantially, possibly more than the market, which has repressed the P/E. If not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

View our latest analysis for Aristocrat Leisure

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ASX:ALL Price Based on Past Earnings September 16th 2020
If you’d like to see what analysts are forecasting going forward, you should check out our free report on Aristocrat Leisure.

Is There Any Growth For Aristocrat Leisure?

Aristocrat Leisure’s P/E ratio would be typical for a company that’s only expected to deliver limited growth, and importantly, perform worse than the market.

If we review the last year of earnings growth, the company posted a terrific increase of 162%. The strong recent performance means it was also able to grow EPS by 276% in total over the last three years. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Turning to the outlook, the next three years should bring diminished returns, with earnings decreasing 17% per year as estimated by the analysts watching the company. Meanwhile, the broader market is forecast to expand by 19% per year, which paints a poor picture.

With this information, we are not surprised that Aristocrat Leisure is trading at a P/E lower than the market. However, shrinking earnings are unlikely to lead to a stable P/E over the longer term. There’s potential for the P/E to fall to even lower levels if the company doesn’t improve its profitability.

The Final Word

Using the price-to-earnings ratio alone to determine if you should sell your stock isn’t sensible, however it can be a practical guide to the company’s future prospects.

As we suspected, our examination of Aristocrat Leisure’s analyst forecasts revealed that its outlook for shrinking earnings is contributing to its low P/E. At this stage investors feel the potential for an improvement in earnings isn’t great enough to justify a higher P/E ratio. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.

It is also worth noting that we have found 2 warning signs for Aristocrat Leisure (1 is potentially serious!) that you need to take into consideration.

If these risks are making you reconsider your opinion on Aristocrat Leisure, explore our interactive list of high quality stocks to get an idea of what else is out there.

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This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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