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Does Aristocrat Leisure (ASX:ALL) Deserve A Spot On Your Watchlist?

Simply Wall St

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It's only natural that many investors, especially those who are new to the game, prefer to buy shares in 'sexy' stocks with a good story, even if those businesses lose money. Unfortunately, high risk investments often have little probability of ever paying off, and many investors pay a price to learn their lesson.

So if you're like me, you might be more interested in profitable, growing companies, like Aristocrat Leisure (ASX:ALL). Now, I'm not saying that the stock is necessarily undervalued today; but I can't shake an appreciation for the profitability of the business itself. While a well funded company may sustain losses for years, unless its owners have an endless appetite for subsidizing the customer, it will need to generate a profit eventually, or else breathe its last breath.

View our latest analysis for Aristocrat Leisure

How Quickly Is Aristocrat Leisure Increasing Earnings Per Share?

The market is a voting machine in the short term, but a weighing machine in the long term, so share price follows earnings per share (EPS) eventually. That means EPS growth is considered a real positive by most successful long-term investors. Who among us would not applaud Aristocrat Leisure's stratospheric annual EPS growth of 38%, compound, over the last three years? Growth that fast may well be fleeting, but like a lotus blooming from a murky pond, it sparks joy for the wary stock pickers.

One way to double-check a company's growth is to look at how its revenue, and earnings before interest and tax (EBIT) margins are changing. On the one hand, Aristocrat Leisure's EBIT margins fell over the last year, but on the other hand, revenue grew. So if EBIT margins can stabilize, this top-line growth should pay off for shareholders.

You can take a look at the company's revenue and earnings growth trend, in the chart below. Click on the chart to see the exact numbers.

ASX:ALL Income Statement, June 13th 2019

In investing, as in life, the future matters more than the past. So why not check out this free interactive visualization of Aristocrat Leisure's forecast profits?

Are Aristocrat Leisure Insiders Aligned With All Shareholders?

Like that fresh smell in the air when the rains are coming, insider buying fills me with optimistic anticipation. That's because insider buying often indicates that those closest to the company have confidence that the share price will perform well. However, insiders are sometimes wrong, and we don't know the exact thinking behind their acquisitions.

Any way you look at it Aristocrat Leisure shareholders can gain quiet confidence from the fact that insiders shelled out AU$406k to buy stock, over the last year. When you contrast that with the complete lack of sales, it's easy for shareholders to brim with joyful expectancy. We also note that it was the Chairman, Neil Chatfield, who made the biggest single acquisition, paying AU$144k for shares at about AU$24.02 each.

Along with the insider buying, another encouraging sign for Aristocrat Leisure is that insiders, as a group, have a considerable shareholding. Indeed, they hold AU$28m worth of its stock. That's a lot of money, and no small incentive to work hard. Even though that's only about 0.1% of the company, it's enough money to indicate alignment between the leaders of the business and ordinary shareholders.

While insiders already own a significant amount of shares, and they have been buying more, the good news for ordinary shareholders does not stop there. That's because on our analysis the CEO, Trevor Croker, is paid less than the median for similar sized companies. I discovered that the median total compensation for the CEOs of companies like Aristocrat Leisure, with market caps over AU$12b, is about AU$5.1m.

The Aristocrat Leisure CEO received AU$4.5m in compensation for the year ending September 2018. That comes in below the average for similar sized companies, and seems pretty reasonable to me. While the level of CEO compensation isn't a huge factor in my view of the company, modest remuneration is a positive, because it suggests that the board keeps shareholder interests in mind. It can also be a sign of good governance, more generally.

Does Aristocrat Leisure Deserve A Spot On Your Watchlist?

Aristocrat Leisure's earnings per share growth has been so hot recently that thinking about it is making me blush. Better yet, we can observe insider buying and the chief executive pay looks reasonable. The strong EPS growth suggests Aristocrat Leisure may be at an inflection point. For those chasing fast growth, then, I'd suggest to stock merits monitoring. Of course, identifying quality businesses is only half the battle; investors need to know whether the stock is undervalued. So you might want to consider this free discounted cashflow valuation of Aristocrat Leisure.

The good news is that Aristocrat Leisure is not the only growth stock with insider buying. Here's a a list of them... with insider buying in the last three months!

Please note the insider transactions discussed in this article refer to reportable transactions in the relevant jurisdiction

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. 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. Simply Wall St has no position in the stocks mentioned. Thank you for reading.