Gaming machine maker Aristocrat dives as analysts fear worse to come, by Cath Hart - The Australian - 31st July 2008
Investors punished gaming giant Aristocrat Leisure for earnings downgrades and the news that its chief executive was leaving, wiping 20 per cent off the company's share price to drive it to a five-year low yesterday.
Analysts have warned that the company could post further downgrades ahead of its August 28 results announcement, as conditions in the US continue to deteriorate.
The gloomy economic climate in North America and Australia saw the poker-machine maker announce cuts to its earnings forecasts on Tuesday, downgrading first-half earnings 44 per cent to $70 million, and full-year earnings down 19-23 per cent to between $190 million and $200 million.
The day before the downgrade, Aristocrat's chief executive Paul Oneile, a former international film distribution executive, announced he would not be renewing his contract with Aristocrat, which expires in December.
Mr Oneile told The Australian the severity of the credit crunch -- which was partly to blame for Aristocrat's downgrades -- had "taken a lot of people by surprise".
"Australia has been a little shielded, but it's started to come home more recently with the various downgrades in the banking sector recently," he said.
The company had seen casino projects in North America deferred or cancelled, as lines of credit dried up or as investors wait for more certainty.
In Australia, the rising cost of living and smoking bans in NSW had emerged as the key challenges, he said.
"Everybody has to prioritise their household expenditure, and a lot of leisure activities are going to go" as households tightened their spending, he said.
However, he ruled out any further downgrades ahead of the company's results on August 28.
"We don't expect anything now and between the end of August, not that I can foresee," he said.
Analysts said that while the earnings downgrades themselves were not surprising, their size was.
Yesterday's market drubbing follows the bruising Aristocrat's share price took after the Aussie dollar soared to post-float highs and as tough economic conditions in the US, which delivers more than half of the company's profits, put the pinch on demand for gambling. The signs of trouble prompted Citigroup to lower its rating for Aristocrat from buy to hold.
Citi analyst Jenny Owen said the chance of further downgrades remained because of management changes and macro conditions. "We understand conditions in the US are deteriorating sharply, with forecast new units as a result of new casinos or property expansions down about 25 per cent in the past month," she said. "The transition to new leadership will likely see an increasingly conservative approach by the company through the period until a new MD/CEO is appointed.
"Should an external candidate be appointed, a lengthy delay may result ... delaying strategic responses to the very weak market conditions Aristocrat Leisure faces in the US and Australia."
Merrill Lynch analyst Daniel Renshaw warned that Aristocrat's hunt for a new CEO could take up to 12 months and that he could not recommend the stock.
Aristocrat Leisure shares fell $1.23 to close at $4.85 yesterday.
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