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

Should you buy 32Red Plc (LON: TTR), Ladbrokes PLC (LON: LAD), 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.

Gaming (or gambling) stocks like 32Red (LSE: TTR)Ladbrokes (LSE: LAD) 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. 

Inflation Is Coming

Inflation is out of control, and people are running scared. But right now there’s one thing we believe Investors should avoid doing at all costs… and that’s doing nothing. That’s why we’ve put together a special report that uncovers 3 of our top UK and US share ideas to try and best hedge against inflation… and better still, we’re giving it away completely FREE today!

Click here to claim your copy now!

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 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.

More on Investing Articles

Female florist with Down's syndrome working in small business
Investing Articles

2 promising penny stocks to buy on the dip

As stock markets continue to correct, I am hunting for oversold penny stocks that I think could help turbocharge my…

Read more »

Hand of person putting wood cube block with word VALUE on wooden table
Investing Articles

I wouldn’t buy Bitcoin today. FTSE value stocks look much better value to me

Now looks like a promising time to buy UK value stocks, while Bitcoin still looks far too risky for me.

Read more »

Portrait of elderly man wearing white denim shirt and glasses looking up with hand on chin. Thoughtful senior entrepreneur, studio shot against grey background.
Investing Articles

The Rolls-Royce share price is below 85p. Here’s what I’m doing!

The Rolls-Royce share price has suffered this year. Trading for below 85p, this Fool decides whether this is an opportunity…

Read more »

A young woman sitting on a couch looking at a book in a quiet library space.
Investing Articles

4 dividend stocks to buy as inflation soars!

I'm hunting for the best dividend stock to invest in as global inflation soars. Here are several high-dividend-yield shares that…

Read more »

Happy young female stock-picker in a cafe
Investing Articles

UK shares to buy now: 3 big fallers I’d snap up

Our writer thinks this trio of strong business performers could be attractive UK shares to buy now for his portfolio.

Read more »

Lady researching stocks
Investing Articles

Could a falling stock market help me get rich?

When the stock market falls, what does it mean for our writer's portfolio? Here's why it could be an opportunity.

Read more »

Hand holding pound notes
Investing Articles

Should I buy these two 12%-yielding dividend shares for my Stocks and Shares ISA?

Do these double-digit dividend yielders offer our author the right balance of risk and reward for his Stocks and Shares…

Read more »

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

3 reasons to buy Lloyds shares at 43p

Our writer outlines three factors that make him bullish on Lloyds shares, as well as one noteworthy risk facing the…

Read more »