Gaming systems companies are on a tear today with Aristocrat Leisure Limited (ASX: ALL) and eBet Limited (ASX: EBT) surging in early trade.
It's hard not to get excited as both companies are enjoying a big step change in earnings at a time when profit growth is hard to come by.
Aristocrat Leisure, which makes pokies machines and systems, jumped 7.4% at the open after management reported a 121.3% surge in earnings before interest, tax, depreciation and amortisation (EBITDA) to $243.4 million on a 73.5% uplift in sales to $685 million for the six months to end March 2015.
The strong interim result was driven by three tailwinds. The first is a successful restructure of the company that saw it shed its underperforming Japanese operations, while the second is strong growth in its Americas operations.
The declining Australian dollar against the US dollar gave the company an added boost as it averaged US81.18 cents in the first half of this financial year compared with US90.76 cents for the same period in 2013-14.
Given that the Australian dollar has fallen below US80 cents and is forecasted to fall further, shareholders can expect the exchange rate to give earnings a further kick in the current half.
It's an overall strong result but I wonder if investors have gotten a little ahead of themselves considering how far the stock has climbed.
Management is predicting its adjusted bottom line will be "broadly in line with the first half" and that puts its earnings per share (EPS) at around 35 cents.
That's in line with what analysts polled on Reuters are expecting and puts the stock on a price-earnings (P/E) multiple of 24x.
While that is not very expensive given its growth trajectory, the stock is starting to look fully valued.
This is why I think it won't be a bad idea for shareholders to take some profit and buy eBet, which supplies backend systems and maintenance services to gaming venues.
eBet is experiencing strong growth in Victoria (its traditionally focused on New South Wales and Queensland) and management is tipping an up to 60% increase in pre-tax profit of between $5.5 million to $5.8 million for the current financial year ending June 30, 2015.
That is well ahead of my forecast of $4.5 million, and if I upgrade the profit number to the bottom end of the guidance range, my discounted cash flow (DCF) valuation jumps to $4.71 from $4.55 a share.
The stock surged 9.5% to $3.70 and is trading on an undemanding P/E of around 14x based on my estimates.
The P/E will drop to just 11.6x in 2015-16 and that makes eBet a good punt in my books.
