Shares of bookmaker William Hill (LSE: WMH) fell by 3% this morning after the group said that 2016 profits would be at the lower end of expectations. Today I’ll explain why I think this relatively modest sell-off could mark the turning point for this battered stock.
What’s gone wrong?
William Hill says that a run of losing results on football matches and horse racing hit the firm’s profits in December. As a result, full-year adjusted operating profit will be about £260m, at the bottom end of the firm’s guidance range of £260-£280m. Previous guidance was for a result of about £280m.
This kind of thing happens occasionally. Profits suffer in the short term, but may benefit in the future. Customers who enjoy a big win occasionally are more likely to keep betting.
In my view, the main news in today’s statement was that “wagering trends continued in line with those previously reported.” This refers back to a statement William Hill issued in November, when it reported a return to growth in online sports betting and double-digit growth in a number of overseas markets.
If these trends are continuing, then when win margins return to normal, profits should also start to rise. Profits should also benefit from an estimated £30m of cost savings being targeted in 2017.
As I write, William Hill shares are trading at about 290p. This puts the stock on a 2017 forecast P/E of 11.7, with a prospective yield of 4.5%. I believe that with modest earnings growth, this stock could easily return to favour and deliver 25% upside from this level.
A more profitable choice?
Despite my optimism, I admit that William Hill’s performance still leaves a lot of room for improvement.
You may prefer to invest in a company that’s already at the top of its game. One such stock is cruise ship giant Carnival (LSE: CCL), whose profits rose by 55% to a record $2.8bn last year. Earnings growth this year is expected to be more modest, but there’s no doubt in my mind that Carnival is currently performing very well in a strong market.
In its recent results, Carnival said that bookings for the first nine months of the 2017 financial year were “well ahead of the prior year at considerably higher prices”. The group expects revenue at constant exchange rates to rise by about 2.5% this year. Analysts expect the group to report adjusted earnings of $3.57 per share, up by about 4% from $3.45 per share last year.
These 2017 forecasts put Carnival stock on a P/E of 14.6, with an expected dividend yield of 2.7%. This may not seem especially cheap, but I believe that if trading remains strong this year, these forecasts could be upgraded.
The big risk for investors is that customer demand may start to slow. Carnival and other major cruise ship operators currently have a high number of new ships on order. If the market slows, these firms could be forced to slash prices in order to fill ships. Profits could fall sharply.
I don’t think we’ve reached that point yet. I reckon Carnival could still deliver further gains, and rate the stock as a cautious buy at current levels.
