The betting sector in the UK is faced with regulatory hurdles. As a result, valuations in the industry may come under more pressure as profits shrink. On the flip side, several companies are attractive and may turn out to be a play on consolidation, however
Betfair: A Target For Private Equity
Betfair(LSE: BET) is the most likely takeover target in the sector. Thats not the only reason why its stock has risen by 5% year to date: Betfair has a strong balance sheet, and its stock doesnt look overvalued based on most trading metrics. The shares trade in line with consensus estimates, but if the bulls are right then upside could be closeto 15%.
Ladbrokes: Time To Deliver
Ladbrokes (LSE: LAD) CEORichard Glynn is under pressure.
The clock is ticking for Mr Glynn, I wrote on August 11, when the shares traded 10% above their current level. A change of leadership isnt necessarily the answer, but MrGlynn must prove that operational changes in the companys online services are going to make a difference in the next few quarters, or investors will not be forgiving.
An oft-rumoured takeover target, Ladbrokes has a market cap of 1.1bn.It could certainly be a play on consolation in the betting industry. Intangibles and goodwill made up 65% of the value of its total asset, which is one element I dont like. Its net leverage isnt particularly high, although Ladbrokes needs growth in order to keep its accounts in good order.
William Hill: A Predator?
William Hill(LSE: WMH) stock is down 12% year to date. With a market cap of 3bn,William Hill could act as a consolidator in the betting industry. Its revenue growth prospects are encouraging, while the balance sheet is in good order. Projections for earnings are less appealing. Based on trading multiples, the shares of William Hill trade 25% higher than those ofLadbrokes. The premium is justified based on most financial ratios and trading metrics.
Paddy Power: Trading High
Consensus estimates arent particularly upbeat about Paddy Power (LSE: PAP), whose stock is trading only 5% below consensus estimates.
This is one of the most expensive equity investments in the betting universe, but Peddy Power promises a steeper growth rate than rivals. Earlier this summer, analysts speculated about a possible merger with William Hill; brokerNumis said that a combined entity would dominate the Australian online gambling market and would also have the leading estate of betting shops in the UK and Ireland.
I am not entirely sure that a such a deal would make sense financially for William Hill. Disposals may also be needed in order to please regulators. Andy McCue takes over as chief executive at the beginning of 2015, it was announced in early September.
Smartphone penetration has now surpassed 60% and tablet ownership more than doubled in 2013 to 36% in the UK adult population. More than eight in ten 25-to-34-year-olds have a smartphone and nearly half have a tablet. Currently, almost a third of betting and gaming consumers have used their smartphone and 16% have used a tablet to gamble online, according to Deloitte.
In this environment,Playtech (LSE: PTEC), whose stock has rallied in thelast couple of years,maybenefit if it continues to diversify its portfolio of clients. The companydevelops software platforms and content for the online, mobile and land-based gaming industry.
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Alessandro Pasetti has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.