Is Tatts Group Limited a better bet on Melbourne Cup?

Tatts Group Limited (ASX:TTS) could provide long-term winning rather than a short-term windfall.

a woman

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With Spring Racing Carnival in full swing plenty of punters are having a flutter on the races.

While it could reasonably be described as an Australian tradition to risk a few dollars on "the race which stops a nation", there is a different bet that could have a much higher chance of a favourable long-term pay-off.

Leading wagering and lotteries business Tatts Group Limited (ASX: TTS) is a major provider of thoroughbred betting in Australia. As one of the market leaders in this sector –the other major listed player is Tabcorp Holdings Limited (ASX: TAH) – Tatts attracts plenty of business during the Melbourne Cup.

At the Annual General Meeting last week, Tatts reminded investors that the group had lifted net profit after tax (on a continuing basis) by 13% year-on-year to $256 million. Amongst the highlights from the financial year 2015 was the growth achieved in digital sales of wagering which grew 12.5% to represent 25.7% of all wagering sales – this growth was helped by the launch of the UBET brand.

Looking forward and management provided an update on the first quarter performance of the Wagering division stating that:

  • "we have seen our wagering turnover return to growth with a turnover lift of 3.6% on the same period last year. It must, however, be emphasised it is still early days."
  • "our blended win rate is circa one percentage point lower on those achieved in the same period last year although we continue to achieve a healthy double-digit win rate. This reflects a combination of a more competitive positioning in the market, migration from pari-mutuel to fixed price and some results running against the book."
  • "in terms of margin performance our first quarter EBITDA margin is in the targeted rate at 23.4%. This compares with the full year margin in FY 14 of 24.3%."

A better bet

The biggest problem faced by investors at any time is weighing up the potential downside risk versus the potential upside reward.

When it comes to gambling the downside is generally quite clear – if you bet wrong, you lose everything you bet.

That's not the case with investing – often a bad investment means losing some of your money, or underperforming the index but importantly, it doesn't usually mean a 100% loss of capital.

Likewise, when gambling, often the odds are known and hence the upside gain can be accurately predicted. In investing, the exact upside is almost never known.

Currently, Tatts shares look richly priced on a forecast price-to-earnings ratio of around 20 times. Despite the pricing, over the long-term I would prefer my money to be backing the earnings potential of this market leading company rather than backing any Melbourne Cup thoroughbred in the hope of a short-term windfall.

Motley Fool contributor Tim McArthur has no position in any stocks mentioned. Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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