Why I’d buy GVC Holdings plc instead of Ladbrokes plc after today’s results

Today’s results from gaming company GVC (LSE: GVC) show that it’s making encouraging progress. They provide a guide as to its future performance and show that it’s a better buy than sector peer Ladbrokes (LSE: LAD).

GVC’s first half results show a rise in revenue of 8% as well as an increase in net gaming revenue of the same amount. This contributed to an increase in EBITDA (earnings before interest, tax, depreciation and amortisation) of 42% versus the same period of the prior year. This shows that the company’s strategy is working well and is delivering on its potential.

The strength of GVC’s brands was evidenced by the growth achieved despite its relatively low marketing spend. In fact, marketing costs amounted to just 21% of net gaming revenue, which is a high return on investment. Marketing spend also contributed to an increase in mobile sports wagers of 55%, while casino and games revenue rose by 98%.

Looking ahead, GVC believes that its organic growth strategy will work out as planned. The opportunities from the acquisition are greater than expected and will be exploited through an increase in marketing investment. As such, GVC now believes that its performance for the full year will be towards the upper end of market expectations.

Ups and downs

GVC is forecast to report a fall in earnings of 23% this year, followed by growth of 89% next year. This puts it on a price-to-earnings growth (PEG) ratio of just 0.2, which indicates that it offers excellent value for money as well as significant upward rerating potential. This compares favourably to sector peer Ladbrokes which itself is undergoing a major transformation following a period of disappointing performance.

Ladbrokes is forecast to record a fall in earnings of 29% this year, followed by a return to growth of 19% next year. This puts it on an attractive PEG ratio of 0.9, but this is far less enticing than GVC’s PEG ratio. Therefore on a growth and valuation basis, GVC seems to be the better buy.

Furthermore, GVC offers superior income prospects to Ladbrokes. GVC isn’t due to pay a dividend this year, but next year it’s expected to yield 3.1% from a dividend that’s forecast to be covered 2.2 times by profit. This compares to a forward yield of 2.7% for Ladbrokes, which is due to be covered 2.1 times by profit.

Clearly, GVC and Ladbrokes are going through rapid change, but are expected to deliver improved financial and share price performance over the medium term. They both have relatively high risk profiles due to their changing business models. But based on their risk/reward ratios, they should make for sound investments. Although the two companies are worth buying, GVC has superior income, growth and value appeal and this makes it the better buy for the long term.

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