As a company board you realise there must be a great deal of scepticism abroad about the performance of the company you administer when a major broker publishes a chart in a note to clients detailing 7 earnings downgrades from May 2007 till yesterday.
That’s roughly one every 11-12 weeks.
That was after the 7th earnings downgrade was delivered to the market late Tuesday after trading finished for the day by poker machine group, Aristocrat Leisure, and charted yesterday by Merrill Lynch.
Yesterday’s bullish upturn gave investors a chance to react to the downgrade and they didn’t spare the company, selling the shares down heavily in early trade.
They dropped to a low of $3.81, (the lowest for five years according to some brokers) and ended down 28% or $1.54 at $3.96.
The previous downgrade was in July, and if you look at the above share price graph from the start of last year, the ALL share price performance is marked by that regular series of slides.
In the past year it has fallen from a high of $12.70 to $3.81, the low yesterday.
To be fair, the company has been hurt by the rapid and sustained rise in the value of the Australian dollar from early 2007 to mid way through this year.
But that has compounded problems in Japan, the US and Australia for its products. And then there’s the management stability, with at least three senior roles at the company now vacant or filled on a temporary basis.
Aristocrat said in its update that earnings before significant before items will be between $120 million and $150 million in the year to December.
Why? A combination of problems, casinos and other buyers are deferring spending, consumer demand for gaming products is stalling here and around the world, and the various major economies are on the way towards recession.
That new earnings range was sharply lower than the previous downgraded estimate: anywhere from 20% to 40% lower on the $190-$200 million estimate in downgrade 6 in July, which was down sharply from downgrade 5 in April when it was around $247 million.
So from April until October, the result of the impact of various factors has been to halve estimates for the 2008 profit.
No wonder shareholders are upset and sceptical.
The company is looking for a new CEO after the last one decided to leave 3 months earlier than planned.
US analysts say that gambling revenues on the Las Vegas Strip in Nevada has fallen for eight straight months and is headed for its biggest annual decline since data started being compiled in the mid-1980s.
Not only is it high oil and petrol prices, the economic slump, but Nevada is one of the black holes of the US housing slump and subprime disaster.
Aristocrat is the largest maker of slot machines behind the Nevada-based International Game Technology, but at times like this, size is no protection, it’s made the company vulnerable.
The company said in its update late Tuesday:
"Aristocrat Leisure Limited (ASX: ALL) today announced that based on results to date and the current trading outlook, the Company is expecting to report an operating (pre abnormal) profit after tax of $120 – $150 million (26 – 33 cents per share) for the year ended 31 December 2008.
"Since the release of guidance in July 2008, global operating conditions have deteriorated markedly with many operators deferring spend.
“There has been a slower than anticipated uptake of the Generation 7 platform and games, exacerbated by delays in releasing new product to market, offset to some extent by the recent depreciation of the Australian dollar.
"The final result remains subject to a large number of variables, primarily driven by volatile economic conditions.
"In addition, the Company expects to record a net one-off (abnormal) loss after tax of approximately $22 million (5 cents per share) representing Class Action settlement costs, offset by profits on property sales."
Goldman Sachs JBWere said yesterday in a note to clients:
We recently downgraded our CY08 and CY09 sales forecasts by 5-10% which was largely offset by our revised currency assumptions.
“Clearly we underestimated the extent of the economic impact, but today’s warning also points to a slower uptake of Viridian. The combined impact results in material downgrades across the forecast period.
The firm said there were suggestions that ALL’s competitive positioning in the market place is worsening, the company’s operating environment is deteriorating as economic conditions continuing to worsen in key markets of US, Australia, Japan and emerging countries.
“There’s a management vacuum following recent key man departures including the group CEO, Head of US operations, and Head of R&D.
It said there was "Little visibility on the ongoing business model. ALL’s earnings have become increasingly difficult to forecast and as such we have very little conviction in our forecasts. To illustrate this point, we note that the initial consensus forecast for ALL’s FY08 EPS was 83¢.
"The low end of management’s guidance is now 26¢. Clearly after a stream of profit warnings, management has difficulty forecasting as well. Until we get more clarity on the appointment of a new CEO, the detail behind the CY08 result, and the macro outlook, we cannot recommend investors continue to hold the stock.
Merrill Lynch, which provided that handy table of downgrades said:”Three key drivers of the downgrade appear to be 1) The Australian business suffering very soft markets due to regulatory issues (Dubbo RSL decision) and an economic downturn combined with a lack of ALL product being brought to market in 2H08, 2) Lower expectations for 2H08 sales in Japan and 3) US ma
