It has been a good summer for gambling stocks amid reports that the Government is ready to ease up on its threat to slash the maximum play on 'crack cocaine' fixed odds betting terminals from £100 to just £2. Ladbrokes Coral Group(LSE: LCL), which has more than 3,500 shops across the country, would have been hit particularly hard and its share price is up almost 15% in the last three months.
It is slipping back today following publication of its trading update for the four months to 29 October. The share price is down 2% despite a small rise in group revenues and strong growth in its digital and European divisions, with its UK retail business continuing to decline.
Group net revenue rose 3%, or 2% at constant currency, following a 2% drop in the second quarter. The standout figure was a 17% rise in European retail net revenue, or 12% at constant currency. Digital net revenue also lifted, rising 12%, with Sportsbook net revenue up a hefty 18% and Gaming net revenue up 6%. This was offset by a 1% drop in UK retail net revenues.
What are the odds?
Ladbrokes Coral CEO Jim Mullen hailed a positive trading performance, with solid delivery on key operational and financial targets including the swift integration of people, operations and platforms following the recent merger. He added that the Ladbrokes brand in Australia and the Eurobet brand in Italy should continue to post "very strong revenue growth".
The regulatory review on fixed-odds betting terminals remains a threat. Analysts reckon £20 or anything above that will be good news, while £2 could trigger hundreds of shop closures and a share price shock.
City forecasts remain bullish, however. After four years of negative earnings per share (EPS) growth, analysts are pencilling in 76% in 2017 and 34% in 2018. The yield is forecast to rise from today's 2.2% (with healthy cover of 2.2) to a juicy 4.8% over the same period. Ultimately, dividends are the things make you rich.
Ladbrokes Coral looks cheap at its forecast valuation of 11.1 times earnings, but beware that fixed odds decision. We should find out whether the group is a winner or loser on 23 January.
Rival Paddy Power Betfair(LSE: PPB) is also on a winning streak, its share price up 18% in the last three months. I have been sceptical about the stock before, and remain unconvinced today, due to its combination of hefty valuation and poor share price performance. It still trades at around 25 times earnings, despite being 5% lower than a year ago.
However, it is growing earnings faster than Ladbrokes Coral, with latest figures showing Q3 revenues up 9% to £440m, driven by 11% growth in sports revenue.
Stakes growth has been strong even without a major football tournament and next year it should migrate its customers to a new integrated platform, which should improve efficiency and the customer proposition. Paddy Power also enjoys optimistic EPS forecasts of 15% and 14% in 2017 and 2018 respectively, when the yield should rise to 2.5%.
The group has far less to fear from the crack cocaine crackdown due to its greater sports, digital and international exposure, with revenue from betting shops totalling just £85m. Outgoing CEO Breon Corcoran has even backed a clampdown and called for the stake to be cut to £10, which shows confidence. Paddy Power could prove a solid bet.
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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.