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Here’s why I’d buy Paddy Power Betfair plc and this bargain turnaround stock

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Investors in bookmaker Paddy Power Betfair (LSE: PPB) have made a losing bet, with the stock down 25% since Paddy Power and Betfair combined forces in February 2016. They are still losing today with the stock down 4.2% in early trade on publication of its preliminary results for 2017. Should you place your money elsewhere?

Power up

The good news is that Paddy Power Betfair group posted a net profit in 2017 of £217.7, reversing a £5.7m loss in 2016. Revenues jumped 13% to £1.75bn, operating profit climbed 19% to £392m, and earnings per share (EPS) rose 20% to 398p.

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Chief executive Peter Jackson was bullish, talking up the fastest sports book app in the market” and lining up new products ahead of this summer’s World Cup. The group is planning to boost investment in international markets, and is prepared for regulatory and fiscal changes expected in the UK, Australia and US.

Losing the losers

So why are investors so downbeat? Paddy Power Betfair was helped by favourable sports results in the fourth quarter, but there is a downside to winning. “This sustained period of bookmaker friendly results has, however, significantly affected customer activity, including reduced re-cycling of customer winnings,” the group admitted.

World Cup winner

When I examined the stock in November it was on a winning streak, but I urged caution due to its volatile performance and heady valuation. It traded at 25 times earnings then but today’s forward valuation has fallen to a more amenable 19 times. EPS are forecast to grow 13% this year and 6% in 2019.

Dividend policy is progressive with a 21% in the year’s total dividend to 200p per share, although the forecast yield is just 2.4%. Paddy Power Betfair’s numbers are slowly moving back into line and the World Cup is coming.

Quite the Lookers

Motor retail and aftersales service group Lookers (LSE: LOOK) also reported on Wednesday after a tough couple of years that has seen its share price fall a hefty 40%. It has been punished by falling car sales across the market, as hard-pressed consumers retrench. In November, Royston Wild suggested giving it a wide berth. Today the market is more positive, with the stock up 1.3% at time of writing.

Today’s 2017 annual results are headlined Solid underlying growth in a challenging market, with increased dividend and share buyback plan announced”. Highlights include a 12% rise in total new car turnover, or 3% on a like-for-like basis, despite a reduction in overall market volumes. Total used car turnover rose 19% or 13% like-for-like basis, against strong comparatives.

Hit the road

There is continued demand for aftersales while Lookers has helped its own case by investing in its multi-channel customer experience, especially the website, driving significant increases in visitor and enquiry levels”.

Chief executive Andy Bruce hailed the group’s resilience, and strong momentum in used cars and aftersales despite a 5% dip in the overall new car market. March order books are in line with expectations. All of which looks promising to me, given the stock is trading at a forward valuation of just 6.2 times earnings and yields a forecast 4.4%, covered 3.7 times. EPS forecasts look patchy, as do UK economic prospects, but Lookers is motoring again.

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Harvey Jones has no position in any of the shares mentioned. The Motley Fool UK has recommended Paddy Power Betfair. 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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