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This ASX 200 stock is next to join the $1bn profit club

Brendon Lau

You won’t find many stocks rising above the gloom today with just about every sector trading in the red. This makes the rise in the Aristocrat Leisure Limited (ASX: ALL) share price that much more noteworthy as the gaming machine maker chalked up a second day of strong gains.

The Aristocrat share price jumped a further 2.6% to a seven-month high of $29.14 during lunch time trade after chalking up a 7% surge yesterday on the back of its better than expected results.

In contrast, the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index has slumped 0.7% as investors grow increasingly wary about the trade war between China and the US.

On track for $1 billion+ net profit

The good news for Aristocrat is that gambling isn’t really a cyclical business and if you are worried that you may have missed the boat on the stock, brokers believe there’s plenty of upside left.

In fact, UBS is predicting that Aristocrat will soon join the exclusive billion-dollar profit club as soon as next year.

There are currently only 25 companies out of around 2,400 on the ASX that generate at least $1 billion in profit and these include household names like the big for banks such as Commonwealth Bank of Australia (ASX: CBA), supermarket giant Woolworths Group Ltd (ASX: WOW) and Aussie legends like CSL Limited (ASX: CSL) and BHP Group Ltd (ASX: BHP).

Aristocrat posted a first half normalised net profit (excluding amortisation of acquired intangibles) of $422.3 million, or 16.8% ahead of 1HFY18 and around 4% above consensus forecast.

One billion reasons to buy the stock

This means its full year profit for the period ending September 30, 2019, will come close to $900 million.

“Overall our target of $1bn in profit by FY20E is n track with the land based business continuing to expand its current 21% revenue share (ex Oklahoma) and the outlook for digital improving into the 2H with the release of major game titles,” said UBS.

“There is further upside in the multiple (still c.4 P/E points below long-term trends) as the market becomes more comfortable about digital execution.”

Concerns about growth in its digital (or social gaming) business have been hanging over the stock over the past few months. Some of this is staring to unwind but management will need to show the business can sustain double-digit growth.

UBS believes the stock is entering a “consensus upgrade cycle” and is recommending investors buy the stock with a price target of $34.10 a share.

Just about all the other brokers also have a similar bullish call on the stock following the results. Deutsche Bank believes the stock will be re-rated by the market and it sees big upside for the stock given its price target of $42 per share.

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Brendon Lau owns shares of Aristocrat Leisure Ltd., BHP Billiton Limited, Commonwealth Bank of Australia, and Woolworths Limited. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of CSL Ltd. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

The Motley Fool's purpose is to help the world invest, better. Click here now for your free subscription to Take Stock, The Motley Fool's free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson. 2019