Ladbrokes (LSE: LAD), Serco (LSE: SRP) and G4S (LSE: GFS) report interim results this week. They are all troubled, for different reasons. There is better value elsewhere, in my view. Still, I do not dislike Ladbrokes.
Ladbrokes: A Calculated Bet
“Chief Executive Richard Glynn needs to prove that the British bookmaker’s recent strategic moves are bearing fruit when it posts results this week,” Reuters reported on Sunday in the wake of press speculation about Mr Glynn’s future.
The clock is ticking for Mr Glynn. Shareholders have had to digest a dreadful performance this year, with Ladbrokes shares down almost 30%. Ladbrokes stock looks cheap right now, but it could get cheaper if Ladbrokes doesn’t prove that changes in its online services are paying dividends. It is a tough time for a company whose traditional betting shop business is struggling to keep up with a sluggish recovery. Tax charges in the UK pose a serious threat to profits, too.
What’s next?
Forecasts for sales, cash flow, operating profitability and net income margin aren’t particularly promising. Financially, Ladbrokes seems safe, though. Its forward valuation, as gauged by its market cap plus net debt divided by adjusted operating cash flow, indicates that in spite of apparent regulatory risk, Ladbrokes stock may be a calculated bet at this price.
A string of profit warnings last year prompted speculation that Ladbrokes would be taken over. If the company surprises investors in the next couple of quarters, such an outcome shouldn’t be ruled out. More debt and/or equity capital would be needed to expand a footprint that is rather limited.
Uncertain Times At Serco and G4S
I don’t think Serco and G4S are investable. Their shares are cheap, but their operations are strained. Financially, both companies are in dire straits, although G4S seems to be finding it easier to get its operations back on track, and that shows in its performance on the stock market. G4S shares are flat this year and are up 4% in the last 12 months. Shares of Serco are down 34% and 46% this year and in the last 12 months, respectively.
As they report interim results this week, several risks weigh on their valuations, including: a) impairment risk; b) restructuring risk; c) management risk; d) and legal risk. Based on forecasts for sales and earnings, Serco shares are fully valued. Dilution risk stemming from a weak capital structure is a real concern for Serco shareholders as market conditions remain challenging.
Prospects are more encouraging at G4S, whose revenues and operating profits are expected to grow by 11% and 15%, respectively, in the next couple of years. Based on trading multiples, G4S’s shares are cheaper than Serco’s. Still, G4S shares also look fully valued, particularly in the light of a net leverage position that offers little reassurance to investors.
