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Jumbo Interactive trumps Tatts Group

At the end of August, Tatts Group’s (ASX: TTS) preliminary annual report will be released, showing a full year of business after losing the Tatts pokies Victoria licence in August 2012. Since Sept 2011, the share price has risen 40%, so the market doesn’t seem too gloomy about future earnings.

The intrinsic value of Tatts Group shares has a question mark on it because we don’t know the exact reduction in earnings caused by the loss of the Victorian pokies licence in August 2012 that will be reported. The preliminary annual report will be released in late August.

Another change — the addition of the revenue and earnings from taking over the South Australia lotteries licence in December 2012 — will be in the report also, so the net difference can be seen. The December 2012 half-year report stated that between 11 Dec., when the SA lotteries and keno business commenced, and 31 Dec., the new business added $3.4 million to EBIT. Annualised, that 20-day amount would become about $62 million.

How much of this projected EBIT could become net profit for the whole year? We will have to wait to see the report later this month. The current share price is around the $3.20 IPO price it started out at in 2005, so there has been no great appreciation. The dividend yield has been around 8%-9%, so a steady return from that would be the only reason for buying or holding Tatts Group stock at the time.

For investors who want return and share price growth (why wouldn’t you?) you should move on. The extra earnings the company will get will not offset the loss of Tatts’ Victoria pokies completely, so you would need to see growth in new areas and in other segments.

Expanding its online lotteries overseas in the US and Germany, Jumbo Interactive (ASX: JIN) is seeing strong growth. It’s even developing online games for Tatts Group’s Northern Territories lotteries. Although it is starting from a much smaller base (market capitalisation of around $86 milliion), the growth potential is much greater than Tatts. There are some regulatory hurdles it must get past for the US market, but the $60 billion North American lottery market dwarfs the $4 billion Australian market.

By teaming up with American grocery stores and petrol station chains, Jumbo Interactive gets a physical presence without the direct cost of maintaining it. If government restrictions on online gambling are not applied in the same way to online lotteries, then Jumbo Interactive can avoid having its US growth lessened, opening the way to larger earnings.

Foolish takeaway

Striking the balance between current return and future growth is a part of understanding the value of a stock. The price of a stock is based on earnings, but sometimes they aren’t correlated well because of imperfect information or foresight. You have to keep up on what the company is doing, and know what you own.

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Motley Fool contributor Darryl Daté-Shappard does not own shares in any company mentioned. 

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