Don't buy Betfair - take a punt on this stock instead
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Friday's close: FTSE 100 up 0.9% to 5,598... Gold up 0.27% to $1,295.95/oz... £/$ - 1.5826
From David Stevenson, across the river from the City
Dear Paul,
Who made the real money out of the stock market rally of the past three months?
Not your average small investor. Most of them would have racked up chunky losses during the second quarter of the year. They'll only just about be recouping these now.
No, the big winners are elsewhere. People and institutions involved in selling companies are doing best, as we explain below. We're seeing a steady stream of IPOs (initial public offerings), as investment banks and company owners try to cash in on the trend.
The latest news on this front is that bookmaker Betfair is about to float its shares on the market. So should you buy in - or are there better bets elsewhere?
Be warned: private investors often lose out with IPOs
Corporate advisors love to see share prices rising. The people who package up companies for sale need a bullish market backdrop in order to sell them on. Otherwise most investors simply won't have enough confidence to buy into the IPOs they're being offered.
But if you're buying stocks, you really want things to be the other way around. The best time to acquire shares is when they're out of favour, meaning that other investors don't want to know. So when an IPO is being heavily plugged, it feels instinctively right to avoid it.
Indeed, history shows that private individuals often lose out when they buy into IPOs. And that's the main reason why we don't like them.
The key point about IPOs is that sellers always know more than buyers. The sale price and time are set by the existing owners and their advisors. As the latter are flogging shares they don't own, they clearly reckon they'll be better off without them. So they unload them at the best price they can. Indeed, the 'better' the corporate advisor helping the company, the more wary you should be about what he's saying.
We covered IPOs more fully a couple of months ago in the magazine: Should you ride the wave of new IPOs? If you're not already a subscriber, you can sign up here and get your first three issues free.
But for a warning as to how disappointing IPOs can be for investors, just remember the online grocery business Ocado. Our editor-in-chief, Merryn Somerset Webb, warned not to get involved in this "glorified taxi service" back in July. The stock has since dropped 23% in just two months. But the founder shareholders have still made lots of money from the deal.
Why am I writing about this today? Because, having first thought about the idea five years ago, another internet-based firm has now decided to float on the UK stock market.
Why you should avoid Betfair
Betfair is the firm that pioneered the idea of the betting exchange. This is where customers bet against each other, cutting out the traditional bookie. The company is also big in spread betting (to find more about how this works, and how it can help you to play the markets, take a look at our website).
It's an interesting business. But is it a good investment?
At the moment, the issue details are rather sparse. We don't know the IPO price or even the timetable of events. So it's hard to take a proper investment view on the stock.
However, the chances are that the market value will be high enough - figures like £700m are being bandied around - for the bookie to jump straight into the FTSE 250 index.
Clearly, that could attract lots of private interest, not least from Betfair clients. But private individuals aren't being allowed in on the float. "While large institutions will get to buy in, we'll have to wait for the share to start trading before we can place our bets", says Simon English in the Evening Standard.
Of course that might not be all bad. It'll stop people being caught out by paying too much to start with. Because while some of the stuff we know about the company is quite impressive, some is rather less so.
For example, Betfair has net assets of £182m, of which £150m is in cash. That's good. Yet although the firm's revenues have almost trebled since 2005 to £340m in the financial year to April 2010, net profits have actually fallen from £20m to £15m over that time. That's not so good.
Betfair is clearly very different to Ocado - it makes money for one thing. But even based on last year's £39m net profit, a £700m market cap would imply a p/e ratio of around 18. That compares with spread betting rival IG Index on a sub-15 current year multiple. That would be too pricey to get me buying.
Further, as English points out, "one side effect of the float is that Betfair now has to make available a huge amount of information it could previously keep under wraps. That's likely to prove mouth-watering to wannabe competitors". In other words, the risks of rivals trying to muscle in on Betfair's business are rising.
On top, the two founders have a combined stake which could be worth more than £150m. Yet "more than half the group of 14 major investors - including this pair - who own 75% of Betfair are expected to trim their stakes to allow in new investors", says Alistair Osborne in The Telegraph.
In short, existing shareholders will do very nicely in cashing up part of their holdings. But why would you want to buy their shares?
In fact, the leisure-related sector in general doesn't look a great place to invest in for the moment. Yet there may be an interesting recovery stock.
This stock looks worth a punt instead
Shareholders in Ladbrokes (LSE: LAD) have had a bad run for ages. The stock has underperformed the FTSE All-share index by some 60% over the last three years.
But new boss Richard Glynn has pledged to get the bookie moving again in his "Project Galvanise" programme. A string of other management changes is aimed at "changing the DNA of the business" by making it much more customer responsive. Debt has fallen sharply, while dividend payments have resumed.
We tipped Ladbrokes a month ago, since when it's climbed 5%. But on a current year p/e of just over 9.5, and a 5% prospective yield, this stock still looks well worth a punt.
Got a comment on this article? Leave a comment on the MoneyWeek website, here.
Until tomorrow,
David Stevenson
Associate editor, MoneyWeek
FULL ARTICLE AND BLOG:
http://www.moneyweek.com/investment-adv ... 03901.aspx
Money Morning article re Betfair float
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Irish Rover
- Posts: 15
- Joined: Fri Oct 02, 2009 1:33 am
Interesting. But I thought a company valuation closer to £1.5 billion is in the air? This article suggests a £700m valuation is too high, a colossal difference.pt9091 wrote:However, the chances are that the market value will be high enough - figures like £700m are being bandied around -
Am I missing something?
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RinTaaramae
- Posts: 15
- Joined: Tue Jul 13, 2010 5:06 pm
It's a great article. You should buy Ladbrokes shares instead, because the new CEO has a plan to galvanise the company. Genius.