Aristocrat Leisure Limited's (ASX:ALL) Prospects Need A Boost To Lift Shares
With a price-to-earnings (or "P/E") ratio of 10.9x Aristocrat Leisure Limited (ASX:ALL) may be sending bullish signals at the moment, given that almost half of all companies in Australia have P/E ratios greater than 20x and even P/E's higher than 38x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/E.
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. One possibility is that the P/E is low because investors think the company's earnings are going to fall away like everyone else's soon. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.
View our latest analysis for Aristocrat Leisure
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?
The only time you'd be truly comfortable seeing a P/E as low as Aristocrat Leisure's is when the company's growth is on track to lag the market.
Retrospectively, the last year delivered an exceptional 162% gain to the company's bottom line. The latest three year period has also seen an excellent 276% overall rise in EPS, aided by its short-term performance. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.
Shifting to the future, estimates from the analysts covering the company suggest earnings growth is heading into negative territory, declining 17% per annum over the next three years. 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 Bottom Line On Aristocrat Leisure's P/E
The price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.
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. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. It's hard to see the share price rising strongly in the near future under these circumstances.
We don't want to rain on the parade too much, but we did also find 2 warning signs for Aristocrat Leisure (1 is significant!) that you need to be mindful of.
It's important to make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and a P/E ratio below 20x).
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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