William Hill is one of my favourite companies right now: the long-term fundamentals of the industry are good, management are adept at utilising new technology, and the potential from acquisitions is large. Let's look at these points one-by-one.
1) Long-term fundamentals
By instinct I am a value investor so I spend most of my time thinking about companies facing pretty poor long-term trends.William Hill offers the best of both words: long-term secular growth at a value price.
The key to William Hill's potential is online gambling. Not only is this product taking share from offline gambling but, more importantly, online is rapidly increasing the overall demand for gambling.
Let's put some numbers to this. In 2009, total off course gambling turnover, as estimated by the Gambling Commission, was £9.9bn. Horse racing made up about 57% of the total amounts wagered. In 2014, the total amount wagered off course was £8.9bn. Horses made up about 54%.
In 2009, online gambling turnover was £10.2bn. Data for the breakdown by sport isn't available for this year. In 2014, online gambling turnover was £25.4bn with football making up 40% of the total. Tennis is also a huge market worth some 20% of the total.
So lots of numbers, what are the takeaways? First, is that online gambling is growing rapidly but, somewhat surprisingly, this hasn't resulted in massive falls offline. The reason why, and I think something slightly contrary to what bookmakers are saying, is that the average online gambler is different from the average offline gambler. Yes, a lot of people use both but the real growth is online-only gamblers betting on sports like football and tennis.
How big are football and tennis? In 2009, £4.3bn was wagered on football online, now £10bn is wagered every year. Offline, only £1.1bn was wagered offline, less than the dogs. In 2011, £2bn was wagered online on tennis, now £5.0bnis wagered annually. Tennis isn't even a big enough category offline to feature in Gambling Commission statistics.
Compare this to horse racing, £4.8bn wagered offline but £1.9bn wagered online in 2014. Horse racing is clearly still a very significant category offline, particularly as it has huge gross gambling yields, but it just isn't that relevant online.
The truth is that the new consumer attracted to online gambling isn't going to go into a betting shop, they are seedy and pretty awful. I think bookmakers, including William Hill, are completely overstating the synergies between offline and online.…
