Aristocrat Leisure shares fall after cutting profit forecast

(Australia).- Aristocrat Leisure Ltd., the world’s second-largest maker of slot machines, fell the most in more than five years in Sydney trading after cutting its annual profit forecast as much as 40 %.

2008-10-28

United States

Reading time 1:30 min

Aristocrat fell 28 % to close at us$ 2.44 in Sydney, the biggest decline since May 27, 2003. The drop erased us$ 446 million of the company’s market value. The company, whose CEO quit last month, is struggling to find buyers for new games as a stalling US economy discourages casinos from buying machines and Australian venues adjust to smoking bans.

Earnings before items will be between us$ 74 million and us$ 92 million in the year ended December, the company said yesterday, compared with a July forecast of as much as us$ 123 million.

“Until we get more clarity on the appointment of a new CEO, the detail behind the 2008 result and the macro outlook, we cannot recommend investors continue to hold the stock," Adam Alexander, an analyst at Goldman Sachs JBWere Pty. said in a note to clients. Goldman cut its rating to “sell" from “hold" and lowered its price target to us$ 2.08 from us$ 3.93.

The company’s forecast compares with the us$ 113 million average of 10 analyst estimates compiled by Bloomberg prior to the announcement. Gambling revenue on the Las Vegas Strip has fallen for eight straight months and is headed for its biggest annual decline since data started being compiled in the mid-1980s, according to the Nevada Gaming Control Board.

Sydney-based Aristocrat, the largest maker of slot machines behind Reno, Nevada-based IGT, had boosted spending on research and development for new games. “Aristocrat continues to suffer at the hands of misdirected R&D in an environment where customers are less than forgiving," said Steve Wheen, an analyst at Macquarie Group Ltd. in Sydney, who cut his recommendation to ”underperform" from “neutral." “The board clearly has taken control of Aristocrat and is not prepared to wear any more downgrades," Wheen said in a note to clients.

Paul Oneile quit as CEO on September 29, three months ahead of schedule, with David Simpson stepping into the executive chairman’s role as Aristocrat searches for a permanent replacement. “The silver lining in this downgrade is that the job of finding a CEO has suddenly got easier," said Macquarie’s Wheen “Expectations will be virtually nonexistent and the resulting share price may allow any incoming external CEO some chance of achieving a positive total shareholder return."