Friday, July 18, 2008

Should You Bet on William Hill?

William Hill Plc is one of the largest gaming companies in the UK. Its wide-ranging gambling activities include sports betting and casino games, which can be accessed through the phone, on their website, or at what they call Licensed Betting Offices (LBOs), which are retail locations scattered throughout the UK.

Recently, the stock has gotten pummeled, from a high of £6.76 last last year to its current price of £3.05. So what happened? They had a few operational issues in 2007 which appear to have shaken investors. Their internet site is getting pummeled by the competition, and while they spent millions trying to improve it, they ended up giving up on that project and taking a write-down on it, after spending exorbitant consultant fees for a little advice. As a result of these issues and more, management offices have had a bit of a revolving door lately.

Nevertheless, this company has valuable licenses and a strong retail presence within a highly protected/regulated industry. It might be worthwhile to see whether there is value to be found here as a result of a depressed stock price due to a doom and gloom outlook from investors.

Yes their internet site is getting beaten up, but this company's strongest business line is its retail operations. More than 80% of both its revenue and its profits come from its 2,294 LBO locations, and in 2008 this operation should continue to be strong, as the company benefits from regulations allowing for longer operating hours.

The company has been buying back shares, pays a dividend yield of 5%, and has a P/E of less than 7. Seems like a clear buy, doesn't it? Unfortunately, there are a couple of risks that make this investor unwilling to place a wager on this company.

In 2007, the UK unveiled a new Gambling Commission, and as such has clarified the rules concerning the granting of new licenses. In fact, if you want a UK gaming license, just apply here! William Hill has enjoyed decent returns on capital in the last few years, but as new entrants apply for and receive new licenses (so that they too can achieve these returns), their returns should be driven to more normal levels. Considering the stock still trades at at more than 4 times book value, there's still a ways to fall if competition gets intense.

Another worry is the company's debt level. With debt representing 85% of invested capital, there isn't a lot of leeway to allow for a downturn in this company, either due to competition or a downturn in the economy. Many people believe that this industry is immune from economic cycles, but they are sorely mistaken according to Dr. Bill Conerly, whose research in his book, Businomics, suggests that gambling is a cyclical industry. (An article he wrote on the subject is here for those who are interested.)

The stock looks cheap, but the risks are too high. This one's a no buy.

No comments:

Follow by Email