The gambling sector is red-hot. Shares in several companies have tripled in the past year. Others rose even higher. Each week brings fresh news of another company thinking about offering its shares to British investors.
It raises an important question. Should private investors jump into the sector and enjoy the ride? Or has the sector rally already run its course? Would a purchase at current prices be akin to buying at the top? Simple questions often beget complicated answers. Gambling shares are no exception.
As a starting point, it is important to realise this sector consists of four markedly different components.
- Gambling Casinos: A well-established segment of the gambling business. Operators include giants like Rank and smaller competitors like London Clubs International and Stanley Leisure.
- Bookmakers: Another traditional segment. The biggies are Hilton (Ladbrokes), William Hill and Paddy Power.
- Online: A new segment, courtesy of the internet revolution. This group includes sports betting, poker and on-line casinos. The three largest in this group are Sportingbet, Gaming VC Holdings and Betonsports.
- Online Support: These companies operate behind the scenes and are rarely encountered by punters. Examples include Neteller, operator of a money transfer service, and software designers Cryptologic and Fun Technologies.
Casinos and bookmakers have been around for years. According to Shares magazine, they currently generate over $430 million in revenues per year and are growing at five to ten per cent annually.
Online betting shops and support companies are new to the gambling scene. Shares Magazine reports that online bets rose last year by a whopping one-third to $8 billion worldwide. Despite this meteoric growth, the segment currently accounts for just two per cent of traditional gambling revenue. Revenues are expected to grow at least 20 per cent per year during the next few years.
There are no indices available to compare the share price trend for these gambling segments. For this reason, I took a stab at building an index for each component. The following graph reveals that traditional bookmakers and gambling casino shares have absolutely failed to excite investors in recent months.
Take bookmakers for example. Despite steady profits growth, shares have slipped nine per cent on average since the end of June 2004. The TSE-All Shares index rose by 11 per cent in the same period.
Sector boosters warn investors not to write off this segment too quickly. They point out that betting shops now offer punters a range of new products including very success fixed odds betting terminals. Some believe there is considerable room for further profits growth with little evidence that online betting is eating into the revenues of traditional bookmakers. In fact, the reverse seems to be true with online companies encouraging growth at the traditional betting outlets.
One other potential profit boost is also worth thinking about. If the UK treasury were to wipe out tax loopholes currently enjoyed by online betting competitors, it could give traditional bookmakers an opportunity to improve their own margins on the back of price rises by their online competitors.
But these possibilities fall in to the "jam tomorrow" category. As far as the present and recent past is concerned, these shares are under-performers.
Gambling casino shares have also disappointed investors in the last year, although they performed more strongly than bookmakers. Casino shares gained seven per cent since last July (versus +11 per cent for the broad market index). Some of this growth was triggered by government plans to deregulate the industry.
Recall however, that key elements of the plan were recently published by the government and then suddenly changed. A bet in this sector is a bet on the government's ability and desire to deliver all of the promises that have been publicised to date.
In contrast to the weak stock market performance of traditional gambling segments, the two newer segments have been red hot. Shares in online betting companies rose 110 per cent since the end of June 2004. Online support companies gained 92 per cent in the same period.
No one knows with certainty if this growth will continue. Some experts believe the sector will enjoy a few more years of super growth before eventually peaking with a 10 per cent share of the gambling industry.
How should a private investor play this segment of industry? The best approach is to play it with a short-term focus. One straw to the wind is the flood of online companies planning to sell shares to UK investors in the near future. It pays to watch investor reactions to these new offerings. A rapid run-up in price of a new issue might be a clue that investor interest in this sector remains red-hot, at least for the short-run.
A second indicator worth monitoring is revenue growth. Industry experts expect at least 20 per cent annual growth. The more successful companies should significantly out-perform this standard. If you are planning to dip your toe in this sector, a good starting point is to watch the revenue number for your target company.