The Aristocrat Leisure Limited (ASX: ALL) share price is rallying ahead of its first half profit results tomorrow.
Investors are anticipating good news as shares in the gaming machine maker jumped 1.5% to $27.21 during lunch time trade when the S&P/ASX 200 Index (Index:^AXJO) inched up 0.4%.
But there's still room to climb as I believe management will unveil results that will justify Aristocrat being a $30+ stock.
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Growing despite COVID-19
Brokers like Citigroup believe it can deliver double digit earnings growth despite the COVID-19 shutdown that forced casinos like Crown Resorts Ltd (ASX: CWN) and Star Entertainment Group Ltd (ASX: SGR) to close.
"We expect strong growth in Digital and Americas in AUD terms to offset declines in ANZ and International Class III," said Citigroup.
"No dividend will be declared to shore up liquidity; and the focus will be on the outlook for 2H20e given the gradual reopening of casinos underway in the US and the expected reopening of Australian customers in 4Q20e."
Focus on digital, not dividend
I doubt the market will be disappointed if Aristocrat canned its interim dividend. It's a similar case with building materials supplier James Hardie Industries plc (ASX: JHX) where the main reason investors buy these stocks is for their growth potential and not skinny dividends.
The thing to watch closely when Aristocrat releases its results is growth in its digital (social gaming) division. This is likely to be the group's main growth engine going forward.
Mobile gaming apps were gaining strong traction before coronavirus struck. Measures undertaken around the world to keep people at home to prevent the spread of the disease meant even more are likely to embrace the distraction.
Brightening outlook
Having said that, its traditional land-based business (poker machines) could also have turned a corner as its key US market is easing restrictions.
There is a real danger of a second wave of infections in the US. But looking at attitudes towards the virus in that country, I am not sure if even that will be enough to force states into draconian lockdowns.
Key picks in industrials sector
While there are potential challenges waiting in the wings for Aristocrat, the risk-reward equation justifies the stock as a buy.
Aristocrat is one of my key holdings in the industrials sector, along with James Hardie and glove maker Ansell Limited (ASX: ANN).
