Financial services firm Morningstar has raised its economic moat rating for Australian slot machine giant Aristocrat from narrow to wide and increased the company’s fair value estimate from AU$52 to AU$65 due to its growing dominance of the US slots market.
The economic moat rating is applied as a way of evaluating how durable and defensible a company’s competitive advantages are, insinuating that – much like a medieval castle – a wide moat makes it harder for competitors to attack or erode its profits.
In a research note, Morningstar’s Angus Hewitt observed that the number Aristocrat’s North American leased electronic gaming machines (EGMs) has in the five years since March 2020 increased by 51% to around 74,000 units, while rival Light & Wonder’s units have grown by a more modest 13% over the same period and IGT’s has marginally declined.
This matters, he added, because Aristocrat, Light & Wonder and IGT together dominate the EGM industry when it comes to both North American outright sales and leased machines. But Aristocrat is pulling ahead.
“Its already strong competitive position has only strengthened since the pandemic [and we] estimate Aristocrat’s North American installed base is now larger than IGT’s and Light & Wonder’s combined,” Hewitt wrote.
“We think Aristocrat is very likely to outearn its cost of capital over the next decade, and excess returns are more likely than not to persist in the following decade. This satisfies the threshold for a wide economic moat.”
Despite these upgrades, Morningstar still sees Aristocrat’s current share price of around AU$69 as being slightly overvalued – mainly on the market being too optimistic about the long-term strength of its fast-growing digital businesses such as digital casino, which Hewitt believes is more competitively challenged.
However, Aristocrat is still seen dominating in a relatively consolidated market thanks to its abundant resources.
“Success in the electronic gaming machine industry is highly dependent on new game/cabinet design and development, and larger players can generally outspend their smaller peers,” the note states.
“Aristocrat outspends its gaming machine rivals on design and development, both on an absolute basis and as a proportion of revenue. This investment ensures a healthy pipeline of new products and platform enhancements to drive performance, stimulate demand and differentiate from competitors.”
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