FTSE 250 sin stock GVC Holdings (LSE:GVC) has been enjoying a heady return to glory this month. After a spectacular fall from £8.07 to £2.92 in March, it has since risen back up to £6.83. A hike of over 116%.
The gambling giant is benefiting from the lockdown as people stuck at home are seeking out its entertainment offerings such as Foxy Bingo and Party Poker.
Its competitor Flutter Entertainment (LSE:FLTR) has seen a similar trend. Since the March market crash, the Flutter share price has risen 41%.
GVC share price vs. Flutter share price
Ladbrokes owner GVC had a 5% dividend yield, but has since had to scrap this. Its earnings per share are negative and it has slashed its forecast earnings by £50m a month. GVC initially thought revenue would be down £100m a month, so this is a drastic improvement, thanks to various cost-cutting measures.
Despite net gaming revenue being up, closure of its retailers and the cancellation of sporting events has reduced its revenue potential.
With a market cap of £7bn, Flutter is listed on the FTSE 100 index. It has a very high price-to-earnings ratio of 54, which shows it has been a popular stock for a while and may now be overpriced. Its earnings per share are £1.61 and it will still pay its final 2019 dividend but in the form of shares instead of cash. Meanwhile, it has cancelled its 2020 dividend.
Flutter chief executive Peter Jackson said an earnings hit from the Covid-19 outbreak would result in the combined group having a higher debt burden than originally envisaged. However, a merger with Canadian gambling giant The Stars Group (TSG) is still due to go ahead because it will help diversify the group and cement its status globally.
Flutter owns Paddy Power, Betfair, and Sportsbet in Australia and FanDuel in the United States. Many of its staff have been furloughed around the world, but it’s continuing to finance this without government help.
In its Q1 trading update, revenue was up 16% year-on-year to £547m, including sports betting up 13% to £407m and gaming up to £140m.
Are these FTSE stocks a gamble?
With the future of sporting events in limbo, it could be some time before decent revenues return to either of these companies. Billionaire investor Warren Buffett enjoys picking up bargains when the market is volatile. One well-quoted saying of his is “The key to investing is not assessing how much an industry is going to affect society, or how much it will grow, but rather determining the competitive advantage of any given company and, above all, the durability of that advantage.“
Both GVC and Flutter have a competitive advantage and Flutter even more so once its merger with TSG goes through. I think the GVC share price carries more risk than the Flutter share price, but I don’t think either of them is at serious risk of failure. However, the high Flutter P/E is off-putting and neither offers a dividend.
GVC has a debt ratio of 50%, while Flutter’s debt ratio is a mere 7%. The TSG merger is likely to push Flutter’s net debt above 3.5 times core earnings at the end of the first reporting period following completion.
They’re both on my watch list and I would consider buying on a dip.
