Tempted by Paddy Power Betfair? I think this hated dividend stock offers far better value

Shares in FTSE 100 gambling firm Paddy Power Betfair(LSE: PPB) registered decent gains in early trading today as the company provided the market with an update on trading in the third quarter of its financial year.

Thanks partly to a successful World Cup in Russia, revenue rose 12% at constant currency to £483m over the trading period, which included a 15% rise in online revenue in Europe. Unfortunately, the same performance wasn’t replicated across the firm’s retail estate with revenue here falling 1% in the UK, 6% in Ireland and 4% overall.

Further afield, revenue declined 2% in Australia due to sporting results going against the bookmaker, despite a 25% rise in stakes. Across the pond, however, revenue rose 22% with the company stating that it was “encouraged” by the demand for regulated products despite it still being very early in the evolution of US sports betting.

Commenting on today’s numbers, CEO Peter Jackson stated that management was heartened with the “substantial progress” made by the company against its strategic priorities. According to him, Paddy Power Betfair’s scale and strong financial position mean that it is well placed to respond to forthcoming higher betting taxes and limits on fixed odds betting terminals and to take advantage of growth opportunities within the industry.

Despite earnings before interest, tax, depreciation and amortisation (EBITDA) falling 15% at constant currency to £101m over the three months due to taxes and acquisition costs, the company also saw fit to revise the lower end of its guidance for the full year, predicting that this would now be in the range of £465m-£480m rather than the previous £460m-£480m. Whether this makes the shares worth buying is debateable.

On 16 times earnings, Paddy Power Betfair is one of the more expensive gambling firms on the market. At 3%, the yield is also distinctly average given the cash returns on offer at other from other FTSE 100-listed firms.

While its size and growth potential can’t be dismissed, I’d be more inclined to look for value in the gambling industry right now, especially given the forthcoming regulatory changes. With William Hill’s finances continuing to look somewhat shaky, online gaming solutions provider 888 Holdings(LSE:888) would be my preferred bet.

Better odds?

True, 888’s share price hasn’t exactly been on scintillating form of late. Priced at 325p back in May, the very same stock had fallen 46% to a low of 175p towards the end of last month on the back of a fairly uninspiring set of interim numbers in September (which revealed revenue and adjusted earnings per share growth of just 1% and 2% respectively).

With management stating that the outlook for FY profit was “in line with market expectations“, however, I’m tempted to say that the drop looks overdone. It’s also worth remembering that 888’s lack of high street presence means that it neatly sidesteps the aforementioned controversy surrounding fixed odds betting terminals.

If analyst estimates are on the money, the shares now trade on 13 times earnings for the current financial year, arguably making the firm better value compared to the FTSE 100 betting behemoth. Those investing for dividends may also find the forecast 6.2% yield attractive.

Add to this 888’s solid net cash position (equivalent to roughly 20% of the value of the entire company) and high, if somewhat erratic, returns on capital and I suspect this could be one outsider worth backing.

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Paul Summers 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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