Should You Take A Punt On These Gaming Companies: 32Red Plc, Ladbrokes PLC, Bwin.party Digital Entertainment Plc, 888 Holdings Public Limited Company And Betfair Group Ltd

Should you buy 32Red Plc (LON: TTR), Ladbrokes PLC (LON: LAD), Bwin.party Digital Entertainment Plc (LON: BPTY), 888 Holdings Public Limited Company (LON: 888) or Betfair Group Ltd (LON: BET)?

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Gaming (or gambling) stocks like 32Red (LSE: TTR), Ladbrokes (LSE: LAD), Bwin.party Digital Entertainment (LSE: BPTY), 888 (LSE: 888) and Betfair (LSE: BET) may not be for everyone.

However, for those that are not concerned about the ethical implications of investing in gambling, they are interesting investments. 

Research has shown that over the past four decades or so, gaming stocks have — as a whole — outperformed the market by around 2% per annum. This trend has been called the ‘sin stock’ anomaly for the simple reason that no one can understand why it occurs. 

That being said, not all gaming stocks are created equal. So, which company deserves a place in your portfolio?

Cash machine 

As a former shareholder of 32Red, I know that there are two things the company is good at: growing profits and generating cash. 

For the five years through to the end of 2015, it’s estimated that 32Red’s annual pre-tax profit will have quadrupled. The group’s earnings per share have grown at a compound annual rate of 33% since 2010. 

Moreover, since 2010 32Red has generated around £12m in cash, after capital spending. Of this, the company has returned £4.5m to shareholders, around 7.3p per share. 

And the cash returns are unlikely to stop any time soon. 32Red has over £7m of cash on its balance sheet and no debt. According to City analysts, the company is set to yield 4.3% during 2015 and currently trades at a forward P/E of 11.3. 

High-street concerns

The big difference between 32Red and Ladbrokes is the formers high-street presence. 32Red offers an online gaming platform while Ladbrokes relies on its high-street presence to generate the majority of its revenue. 

Ladbrokes reported a 60% fall in quarter-on-quarter profits during the first three months of this year. The company is now searching for ways to boost its recurring income. 

What’s more, Ladbrokes’ online presence has been sliding for some time and competitors surge ahead, concerns over the group’s dividend payout have started to surface.

Ladbrokes is set to yield 6.6% this year although the payout won’t be covered by earnings per share. 

Merger mania 

Bwin.party is currently conducting preliminary talks with “a number of interested parties regarding a variety of potential business combinations”. 

However, the company’s shares have had a terrible year to date, falling by as much as 25%. Nevertheless, City analysts expect the company’s earnings to expand by 25% this year, and Bwin is trading at a PEG ratio of 0.8. The company has a net cash balance and a yield of 3.7% at present levels. 

Similarly, 888 became a takeover target earlier this year when William Hill made an offer for the company, which, ultimately failed. But shortly after the deal fell apart, 888 announced a 14% increase in full-year revenues for 2014. Profits for the period jumped by a third. 

888’s management remains open to other takeover offers and in the meantime the company’s shares support a dividend yield of 3.5%. 888 trades at a lofty forward P/E of 19.9. 

Expensive growth 

Lastly, Betfair, which is an expensive bet on the sector. Specifically, the company currently trades at a forward P/E of 33. Earnings per share are set to expand by 53% this year, before falling by 2% during 2016. 

However, due to the unpredictable nature of the gambling business, it’s difficult to justify paying such a high premium for Betfair’s shares. A run of bad luck for the gaming company could cut earnings estimates in half, which would send the shares crashing back to earth. Also, the company only offers a token dividend yield of 1.2%. 

Only one option 

Of these five companies, only one stands out to me: 32Red. The company’s shares are cheap, the group is cash generative and management looks after shareholders.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Rupert Hargreaves has no position in any 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.

 

More on Investing Articles

Investing Articles

Could the JD Sports Fashion share price double in the next five years?

The JD Sports Fashion share price has nearly halved in the past five years. Our writer thinks a proven business…

Read more »

Bus waiting in front of the London Stock Exchange on a sunny day.
Investing Articles

If interest rate cuts are coming, I think these UK growth stocks could soar!

Falling interest could be great news for UK growth stocks, especially those that have been under the cosh recently. Paul…

Read more »

Investing Articles

Are these the best stocks to buy on the FTSE right now?

With the UK stock market on the way to hitting new highs, this Fool is considering which are the best…

Read more »

Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant
Investing Articles

Can the Centrica dividend keep on growing?

Christopher Ruane considers some positive factors that might see continued growth in the Centrica dividend -- as well as some…

Read more »

Smiling family of four enjoying breakfast at sunrise while camping
Investing Articles

How I’d turn my £12,000 of savings into passive income of £1,275 a month

This Fool is considering a strategy that he believes can help him achieve a stable passive income stream with a…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

2 top FTSE 250 investment trusts trading at attractive discounts!

This pair of discounted FTSE 250 trusts appear to be on sale right now. Here's why I'd scoop up their…

Read more »

Smiling young man sitting in cafe and checking messages, with his laptop in front of him.
Investing Articles

3 things that could push the Lloyds share price to 60p and beyond

The Lloyds share price has broken through 50p. Next step 60p? And then what? Here are some thoughts on what…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

£1,000 in Rolls-Royce shares a year ago would be worth this much now

Rolls-Royce shares have posted one of the best stock market gains of the past 12 months. But what might the…

Read more »