Is Paddy Power Betfair still the best horse to back after today’s results?

Is Britain’s biggest bookmaker by market cap still a worthwhile investment?

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Bookmaker and FTSE 100 constituent Paddy Power Betfair (LSE: PPB) released its interim results this morning. Given the recent merger and acquisition frenzy within the gambling industry, investors will be looking for signs of which companies are pulling ahead in the race for superiority. So, how has the £7.2bn cap been performing?

Clear favourite?

Initially, the numbers look pretty good. Total revenue increased by 18% to £759m over the first half of the year with double-digit growth evident in all four of the company’s divisions (Online, Australia, Retail and US). Euro 2016 performance in the second quarter was a particular highlight. Nevertheless, one-off costs of almost £200m as a result of the recent merger put a damper on things, prompting the company to report an operating loss of £47.5m for the half. Shares dipped almost 3% on the news.

CEO Breon Corcoran stated that the company had “sustained good momentum through a period of considerable change“. He also reflected that the merger between Paddy Power and Betfair was now “largely complete” and that “synergies are being delivered ahead of schedule“, the benefits of which will be felt in 2017. Despite acknowledging the highly competitive industry that Paddy Power Betfair operates in, Cocoran stressed that the company’s strong market position and increased scale should mean that consistent growth is on the cards for the foreseeable future.

I suspect he might be right. The question investors need to ask, however, is whether the shares are still worth buying given Paddy Power Betfair’s high forecast price-to-earnings (P/E) ratio of 27. Perhaps the best way to decide is to scrutinise the fortunes of two of its biggest competitors.

Rank outsider?

While Paddy Power Betfair’s results are something of a mixed bag, its investors are possibly less concerned than those holding shares in William Hill (LSE: WMH). Having become increasingly bemused by the company’s apparent lack of direction over the last year, I wasn’t surprised by its rejection of a joint £3.6bn bid by Rank and 888 and the ousting of CEO James Henderson in July.

The next few weeks could be crucial. Rumours are now circulating of two new takeover bids being prepared, one from Australian businesses Tabcorp and Tatts Group and another from a private equity group. An announcement that the company is seriously considering an offer could see the share price spike.

But while new takeover bids are certainly very possible, they aren’t guaranteed. Moreover, the company’s recent statement that earnings will be at the top end of expectations could be overly optimistic. With its shares on a forecast P/E of 14,  it’s a lot cheaper to buy a slice of William Hill. For me, however, this feels like a speculative investment at the current time.

Dark horse?

After a few rotten years, holders of Ladbrokes (LSE: LAD) have been celebrating something of a winning streak lately. Its share price is up almost 50% since late June in anticipation of its merger with Coral. Should this proceed smoothly and earnings improve, things could get even better for the Harrow-based bookmaker.

Nevertheless, like its FTSE 100 peer, shares in Ladbrokes now trade on a fairly high forecast P/E of 21, suggesting that for now at least, investors may find better value elsewhere. A dividend yield of under 2% is also unlikely to tempt income hunters. Given this, and the uncertainty surrounding William Hill, my money’s on the biggest player on the field.  

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.

Paul Summers has no position in any shares mentioned. The Motley Fool UK has recommended Paddy Power Betfair. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

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