Aussie finance house Macquarie has initiated coverage on bookie Paddy Power Betfair plc (LON:PPB) with an 'outperform' rating.
That is despite the stock trading at around a 60% premium to the sector median price/earnings ratio (based on earnings forecasts for 2018) of 10.8.
“In our view, it is crucial, when investing in highly competitive industries with potentially fluid market shares, to invest in companies with structural advantages. We believe that the gambling industry is one of those and that PPB is the clear structural winner,” Macquarie Capital said.
The gambling industry has low barriers to entry, especially in the sports betting market, and competition is not only intensifying but is set to get tougher still as more markets regulate, Macquarie reckons.
“In such an environment, we believe it is essential to invest in companies with strategic advantages. This does not simply mean investing in the market leader. Indeed, this can be a dangerous approach if it is a legacy position; however, if built on a sustainable and growing competitive advantage, it is a huge opportunity,” the Aussie firm said.
Paddy Power describes itself as “a structural winner in a dynamic and highly competitive market” and Macquarie agrees with this assessment.
According to Macquarie, Paddy Power's ace-in-the-hole is one of scale, both at a global and a local level, which gives the bookie the ability to invest meaningfully in technology and marketing.
The bookie is capable of gaining share in a growing market, but will need to continue investing in technology, marketing, price and new markets, which will likely constrain any expansion in margins.
Macquarie has a price target of 7,590p for Paddy Power; the shares currently trade at 7,630p.