Gambling stocks are an interesting breed. Technically they fall into the 'sin stock' basket, along with tobacco, alcohol and arms businesses, which some investors go out of their way to avoid for ethical reasons. However, some academic research has shown that the so-called 'sin stocks' outperform the wider market thanks to their ability to set prices and the addictive nature of the products.
From a pure investment standpoint, the character of these businesses means that while their shares have been shown to outperform the wider market, they're inherently risky as regulators, health officials, and governments always have one eye on industry practices.
Unfortunately for stakeholders in William Hill(LSE: WMH) and Ladbrokes Coral(LSE: LCL) it now looks as if the government is about to take action to rein-in some of these companies' more dubious business practices. Specifically, it's widely believed that the government will crack down on the fixed-odds betting terminals often found in their stores. The impending crackdown comes after a six-month enquiry into the impact of these terminals on customers. The high-risk, high-reward betting machines have been blamed for fuelling gambling addictions and the bookmakers themselves have been accused of using these machines to put profit before people.
According to news reports, the government is considering cutting the maximum stake allowed on fixed-odds betting terminals to £100 per spin and slowing the speed at which customers can make bets. Right now, gamblers can lose hundreds of pounds a minute on machines. It's estimated that the total spend of British gamblers on fixed-odds betting terminals was £2bn last year, a record figure. Figures show that each fixed odds machine took an average of £49,000 from players in 2015.
Only four are allowed in every shop and assuming William Hill and Ladbrokes have tried to capitalise on fixed terminals as much as possible, these two bookies stand to lose around £200,000 in profit per annum from each store in their portfolios if a ban comes into place. For William Hill, this might not be such a big issue. City analysts expect the company to report a pre-tax profit of £249m next year, the large percentage of which will come from the company's online business. The group has 2,300 shops across the UK.
Ladbrokes meanwhile has 3,700 stores in the UK across both the Ladbrokes and Coral brands. City analysts are only forecasting a pre-tax profit for the group of £85m this year, potentially rising to £205m next year. Although if you assume that each one of the company's stores has at least one fixed-odds terminal, more than £140m of potential profit is at risk from a ban.
This is just a back of the envelope figure, but it should be more than enough to put any potential investor off betting on William Hill and Ladbrokes.
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Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.