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Why I still don’t think it’s time to bet on this battered FTSE 250 stock

Investing in a bookmaker is a far better use of your money than gambling itself. Or is it? Holders of William Hill (LSE: WMH) might beg to differ, having seen the value of their company shares almost halve over the last year. 

Based on today’s less than enthusiastic response to its latest trading update (-3%), it seems many market participants still need to be convinced that this fall is overdone

Losing streak

While short on detail, today’s release did state that adjusted operating profit for the 53 weeks to the start of January is expected to come in around £234m. This is 15% below that achieved in the previous year (although it was at least in the middle of the range previously predicted by the company of between £225m and £245m).

At least some of the blame was attributed to a reduction in year-on-year profits from Hill’s retail estate in the UK, itself suffering as a result of “wider high street conditions.”

With new limits on fixed-odds betting terminals being introduced later this year, and recent consolidation in an already extremely competitive industry, it’s hard to see things improving here any time soon. 

Instead (and like many of its peers), the £1.5bn-cap regards the potential relaxation of legislation surrounding sports betting in the US as its primary growth opportunity. On this front, the firm’s partnership with casino chain Eldorado Resorts is a positive step.

However, time will tell as to whether this market will prove as lucrative as management believes. The FTSE 250 constituent’s US operation “broadly broke even” last year after taking into account “significant expansion costs.

Hill’s shares traded on 12 times earnings before markets opened this morning and yielded nearly 6%. In addition to this, and the aforementioned opportunities in the US, the planned imminent purchase of Swedish gaming company Mr Green and“good underlying performance” from its online offering last year, might be enough to convince some contrarians to take a position.

That said, I’d be inclined to wait to see what exactly CEO Philip Bowcock has planned for its UK estate (due to be “remodelled” in 2019) before deciding whether the company is finally worthy of investment. 

Better odds?

Of course, William Hill isn’t the only company that will benefit from a change on betting rules across the pond. £4bn-cap GVC Holdings (LSE: GVC) — owner of rival Ladbrokes Coral — could do very well from the development, given its US joint-venture with MGM Resorts.

In sharp contrast to the reaction to Hill’s news, last week’s trading update on the whole of 2018 was cheered by investors and it’s not hard to see why. Proforma underlying earnings are now likely to come in between £750m and $755m — ahead of what the market was expecting.

Despite like-for-like revenue falling 3% in the UK, GVC saw online revenue jump 19% over the year. Business was also good in Europe with revenue from retail growing 16%.  

Based on these numbers, CEO Kenneth Alexander reflected that GVC was “materially outperforming the market” and taking market share from rivals in all territories it operates in. 

Still 40% below the share price highs achieved last July, GVC trades on almost the exact same valuation as William Hill’s. A forecast yield of almost 4.8% is lower than that offered by the mid-cap, but this payout is better covered by anticipated profits. 

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Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has recommended GVC Holdings. 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.