Could falling Rank Group shares be primed for recovery?

Jabran Khan takes a closer look at Rank Group shares to determine whether the shares could be a good buy for his portfolio.

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The Rank Group (LSE:RNK) share price has been falling for some time now. At current levels, are Rank Group shares a bargain that could bounce back and recover, or should I avoid them? Let’s take a look at the pros and cons to help me make my decision.

Gambling business

As a quick reminder, Rank is a gambling business based in the UK. Some of its most prominent and best known brands include Mecca Bingo and Grosvenor Casinos.

So what’s happening with Rank Group shares currently? Well, as I write, they’re trading for 91p. At this time last year, the shares were trading for 162p, which is a 43% decline over a 12-month period. The shares took a bit of a hit in June when the business issued a profit warning, but more on that later.

To buy or not to buy Rank Group shares

So what are the pros and cons of me buying Rank Group shares currently?

FOR: Despite a profit warning for the year ended 30 June, analysts are optimistic for Rank Group’s future prospects. I do understand that forecasts may not always come to fruition, however. They predict earnings could surge as high as a triple-digit percentage, and potentially offer a dividend yield close to 5%.

AGAINST: On 20 June, Rank Group announced that it is expecting close to £40m of profit for the year ending 30 June, despite initially reporting it could be between £47m-£55m. Rank Group shares slumped to 79p, but have recovered 15% to current levels. It pointed towards cost pressures but primarily a lack of footfall from international customers and tourists who regularly frequented its London locations, especially prior to the pandemic, that have failed to return. Profit warnings are rarely a good omen for me when reviewing investment viability.

FOR: At current levels, Rank Group shares look decent value for money on a price-to-earnings ratio of just 11. Furthermore, despite a profit warning, at least the company is not in the red and is turning over a profit. Buying now at dirt-cheap levels with a view to longer-term recovery could be a shrewd move for my portfolio.

AGAINST: Macroeconomic headwinds such as soaring inflation and cost pressures have plagued many businesses in the UK. Rank Group is no different. Rising costs put pressure on profit margins. In fact, this is one of the points raised in its profit warning in the update in June. With no end in sight, these cost pressures may continue for the foreseeable future, affecting investor sentiment and returns.

My verdict

Reviewing the positives and negatives, I’ve decided I would not buy Rank Group shares for my holdings. Another factor putting me off is the rise of online gambling in line with the adoption of technology in recent years. Many traditional bingo halls and casino locations have suffered and I believe this trend may continue.

Rank Group shares are tempting, especially at current levels. I do believe they can recover and Rank will continue to be profitable in the future, however. I would rather spend my hard-earned cash on better quality stocks with prospects of profit growth that can offer consistent returns in the longer term.

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.

Jabran Khan has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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