Their influence can be seen in most pubs, newsagents, and during almost every sporting event in Australia, but are wagering and lottery stocks worth the gamble?
Tabcorp Holdings Limited (ASX: TAH) and Tatts Group Limited (ASX: TTS) operate the majority of the dominant gambling services in Australia.
Tabcorp
Tabcorp operates TAB.com.au, Lubbet.com and offers wagering in Tabcorp's own facilities as well as pubs, clubs and hotels in Victoria and New South Wales. It also owns the rights to Keno in Victoria, NSW and Queensland, and is responsible for broadcasting the suite of Sky Racing TV channels and the Sky Sports Radio network in NSW.
Tatts Group
Tatts meanwhile operates the equivalent racing and wagering services in Queensland, South Australia, Tasmania and the NT under the brands TattsBet, TAB, and RadioTAB. Wagering is offered on horse and greyhound racing as well a variety of prominent domestic and international sports.
Tatts also controls lotteries in all Australian states under the brands Tatts, SA Lotteries, NSW Lotteries, TattsLotto, GoldLotto, Golden Casket, PowerBall, Oz Lotto, XLotto, Lucky Lotteries, Lotto 11, and Instant Scratch-Its.
Gaming Services
In addition to lotto and wagering operations, Tabcorp and Tatts operate gaming solutions businesses that offer specialised consulting and support to venues that have electronic gaming machines (i.e. pokies). This part of the business is highly competitive in Australia but could help to provide earnings growth over the longer term.
Financials
Tabcorp's business is dominated by its wagering operations, which contribute nearly 80% of earnings, while nearly 60% of Tatts' earnings are generated by the lotteries business. This is both a blessing and a curse, as both industries are relatively resilient and stable, but are also heavily regulated and offer limited growth.
Both companies generate serious cashflow to fund dividends and have relatively sound balance sheets.
Outlook
Earnings growth between 6% and 12% is expected for the next couple of years, however internet gaming and betting is quickly becoming a problem. While I doubt mobile betting will ever completely replace Tabcorp or Tatts' service, multiple international and domestic competitors are reducing the market share of bricks-and-mortar operators.
Tabcorp or Tatts offer online betting solutions, however they're far from the top of a google search. For me, while these two companies offer defensive exposure to the Australian gambling habit, the low growth environment and increasing competition mean that they are riskier investments than they appear.
