Should you buy a bookie for Brexit?

On first inspection, ‘sin’ stocks look fairly safe bets, particularly during tough economic times. Regardless of what’s going on in the news, people still drink, smoke and gamble. With this in mind (and Brexit at least somewhere on the horizon) should investors consider buying a bookie for their portfolio? Today’s update from FTSE 100 giant, Paddy Power Betfair (LSE: PPB) suggests they should.

Powerful results…

Helped by the drop in sterling and a strong end to this summer’s Euro 2016 football tournament, the market’s largest betting and gaming company saw a 25% growth in Q3 revenue to £404m. With operating profit jumping by 68% to £95m, earnings are now expected to hit £390m-£405m for the year, significantly higher than its previous estimate of £365m-£385m.

The merger between Paddy Power and Betfair back in February also appears to be progressing well with CEO Breon Corcoran suitably buoyant: “Work is underway to combine the best of Betfair and Paddy Power’s technology into a multi-brand, multi-channel, multi-jurisdictional platform that will start to unlock the full potential of the group’s scale and will lead to increased pace of development and faster roll out of new products.”

Whether everything continues to progress so smoothly remains to be seen. However, this is an undeniably positive update from the Dublin-based company, further cementing its status as the clear favourite in a group of highly competitive runners. With figures like these, it’s easy to understand why, on a forecast price-to-earnings (P/E) ratio of just under 21, shares in Paddy Power Betfair aren’t cheap compared to market peers Ladbrokes (15) and William Hill (12), even if the company has lost roughly 11% of its value since issuing its interim figures back in August. 

…but poor odds?

Regardless of whether shares in Paddy Power Betfair appeal however, I believe the hyper-competitive nature of the gambling industry and the threat of further legislation sufficiently weaken the investment case for holding any bookie as part of a strategy to Brexit-proof your portfolio. 

True, if there’s safety in scale, Paddy Power Betfair more than ticks the box. With a market cap of £7.3bn, 600 betting shops, operations in the US and Australia and two of the biggest online sites in Europe, the company towers above its main competitors. That said, the question is whether this dominance will be sustained given the flurry of activity in the industry over the last year that looks set to continue in the future. While today’s update might not make pleasant reading for its rivals, let’s not forget that Ladbrokes and Gala Coral completed their merger this week and will be even more committed to drawing customers to their doors. After many false starts, William Hill might also strike a deal with another company in the sector, thereby offering its investors some hope that it can return to winning ways.

This is before the likelihood of more legislation is even considered.  Following an estimate that 600,000 people engage in problem gambling, there’s now the strong possibility the government will revise its laws on fixed betting machines, thereby hurting the profits of those with a significant presence on the high street (including all three listed businesses mentioned above).  If a review suggests that the current maximum stake of £100 is no longer acceptable (along with the prizes offered), things might just get even tougher for our nation’s bookmakers.

So what should I do?

Despite the attractions of investing in companies like Paddy Power Betfair, I still need to be convinced that buying any bookie is the right thing to do at the current time. The level of competition combined with the threat of further legislation suggests to me that investors should funnel their hard-earned cash into other stocks, regardless of when Brexit officially commences.

If you're worried about what our departure from the EU means for your portfolio and long-term wealth, I strongly urge you to read a special report produced by the experts at the Motley Fool.  Brexit: Your 5 Step Survival Guide should be all you need to negotiate the inevitably choppy waters ahead.

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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.