Shops for making wagers on sports seem as common in the United Kingdom as fish-and-chips stands, with one or two on many main roads. And if you can’t make it to a betting parlor, its operator probably offers an app that will let you gamble with a few taps.
Sports betting now might become similarly widespread in the U.S. The great American expectations for the pastime—blasted by critics as addictive and impoverishing, and praised by fans as fun and lucrative—follow the past week’s Supreme Court decision nixing federal prohibitions on states’ allowing it. Estimates for the U.S. market’s possible annual size range from $100 billion to $400 billion.
For investors, U.K. companies appear to offer a particularly good way to ride this development, as some had prepared for the ruling and boast considerable U.S. operations. Gambling companies William Hill WMH, +0.48% , GVC Holdings GVC, +1.34% and 888 Holdings 888, +2.20% are among the names that bulls view as due for gains. Their stocks popped on the ruling, but there still could more upside.
How’s this for a head start? William Hill already runs 108 of the 192 sports books in Nevada, and it’s the risk manager for sports betting within the Delaware lottery. Deutsche Bank analyst Carlo Santarelli trots out those facts in a recent note, saying the London-based company’s global scale should ensure profit margins that top American rivals’.
“When considering the cash-flow waterfall from a sports book at a regional casino, one must consider that there are many hands in the till,” Santarelli writes. And one of those hands will be from a company that’s “managing the day-to-day functions of the book itself,” he says.
While William Hill shares surged 11% Monday on the court’s decision, that priced in only 30% of the “potential value creation,” reckons Berenberg’s Roberta Ciaccia. The analyst says that estimate comes from number-crunching that assumes the company nabs 10% of the U.S. sports-betting market by 2023. Her calculations suggest that Sportingbet parent GVC’s jump of more than 7% Monday priced in just 40% of its possible upside, but that Paddy Power Betfair’s PPB, +2.21% 12% climb factored in almost all of its potential lift. Berenberg rates Isle of Man–based GVC as a Buy, Ireland-based Paddy Power as a Sell, and William Hill as a Hold.
“Sentiment about the U.S. news will overshadow any possible negative impact from new gaming machine limits” in U.K. betting shops, she adds.
Meanwhile, J.P. Morgan analysts recommend Gibraltar-based 888 Holdings, known for online properties such as 888sport.com. “With operations in all three states [Nevada, Delaware and New Jersey] that have previously legalized online gaming, we see 888 as well positioned to take advantage of this new opportunity,” writes the bank’s Doriana Russo, who rates the shares Overweight.
Check out: Don’t bet on gambling stock Paddy Power
FTSE 100 component William Hill trades at 13 times forward-year estimated earnings, below the blue-chip gauge’s UKX, +1.03% P/E of 14 and fellow FTSE 100 stock Paddy Power’s multiple of 21. FTSE 250 stocks GVC and 888 have forward multiples of 14 and 21, respectively, versus the mid-cap index’s MCX, +0.70% P/E of 16.
Mergers-and-acquisitions action could provide another boost, with Berenberg’s Ciaccia suggesting that U.K. operators might “become targets for U.S. casinos willing to build up a proper sports book.” Overall, she adds, the opportunity is “theoretically vast” but tough to size up, given that it depends on individual states’ decisions, taxation models and other factors. But for many, it will be worth a wager.
This report also appears at barrons.com.