The Motley Fool

Why I’d dump this FTSE 100 growth champion to buy its FTSE 250 peer

Image source: Getty Images.

Gambling company William Hill (LSE: WMH) is currently one of the cheapest stocks in the FTSE 250. Mixed earnings results, coupled with regulatory uncertainty, have put investors off the shares. However, management is committed to reigniting growth and, as part of these efforts, the group is expanding into the United States. 

Today, I’m going to weigh up the pros and cons of investing in the enterprise as it returns to growth.

5G is here – and shares of this ‘sleeping giant’ could be a great way for you to potentially profit!

According to one leading industry firm, the 5G boom could create a global industry worth US$12.3 TRILLION out of thin air…

And if you click here we’ll show you something that could be key to unlocking 5G’s full potential...

Rising losses 

At the beginning of August, William Hill reported a mixed set of half-year results. Adjusted pretax profit declined 13% to £96.3m. But in many ways, this figure is misleading. The company also reported an exceptional charge of £916m, which pushed it into a pretax loss of £820m. This large write off included £883m associated with the UK government’s decision to cut the maximum bet for fixed-odds betting terminals. 

Of the £916m exceptional charge, £17.2m was associated with the group’s expansion into the US and additional restructuring costs. After stripping out all of these costs, adjusted operating profit on existing operations increased 1%, and revenues rose 3%.

International expansion 

William Hill’s push into the US excites me because this is a market with tremendous potential, as it’s still relatively undeveloped. Today, the company announced it had reached an agreement with Eldorado Resorts to become the exclusive partner “in the provision of digital and land-based sports betting services as well as online gaming.” As a result of this deal, the firm now has a presence in “13 states where sports betting is either legal or sports betting bills are tabled.” 

The blossoming US market should allow William Hill to continue to grow despite problems at home. Estimates vary, but it’s rumoured that $150bn is wagered on sports in the underground market each year across the country. This indicates the size of the opportunity for the gambling group and its peers could be many billions of dollars.

I reckon the market isn’t taking this opportunity seriously enough. Shares in William Hill currently trade at a forward P/E of just 10.4 and yield 5.4%, implying investors are not expecting any fireworks from the business. With this being the case, now could be the time to buy.

Too expensive? 

When it comes to growth, I think William Hill could be a better investment than its larger peer Paddy Power Betfair (LSE: PPB).

The main reason why I reckon Paddy Power’s returns in the years ahead will disappoint is valuation. The stock looks expensive. Shares in the betting company are valued at 15.6 times forward earnings, which makes them 56% more costly than William Hill. This premium earnings multiple leaves no room for error if the business’s growth stumbles.

The company is following William Hill into the US. It acquired renowned daily fantasy sports operator FanDuel in May and is planning a significant expansion across the continent as sports betting becomes more accepted.

In the first half of 2018, the group’s US revenue lept 21% to $79m. Further acquisitions are planned to build Paddy Power’s presence within the region, adding to its existing offering. With cash on the balance sheet of £149m at the end of the last reported period, the firm certainly has the resources to chase new deals.

5G is here – and shares of this ‘sleeping giant’ could be a great way for you to potentially profit!

According to one leading industry firm, the 5G boom could create a global industry worth US $12.3 TRILLION out of thin air…

And if you click here, we’ll show you something that could be key to unlocking 5G’s full potential...

It’s just ONE innovation from a little-known US company that has quietly spent years preparing for this exact moment…

But you need to get in before the crowd catches onto this ‘sleeping giant’.

Click here to learn more.

Rupert Hargreaves owns no share 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.

Our 6 'Best Buys Now' Shares

The renowned analyst team at The Motley Fool UK have named 6 shares that they believe UK investors should consider buying NOW.

So if you’re looking for more stock ideas to try and best position your portfolio today, then it might be a good day for you. Because we're offering a full 33% off your first year of membership to our flagship share-tipping service, backed by our 'no quibbles' 30-day subscription fee refund guarantee.

Simply enter your email address below to discover how you can take advantage of this.

I would like to receive emails from you about product information and offers from The Fool and its business partners. Each of these emails will provide a link to unsubscribe from future emails. More information about how The Fool collects, stores, and handles personal data is available in its Privacy Statement.