Lottery ticket: Is it time to buy this discounted ASX 200 stock?

This is still a monopoly business, so can its stocks recover from the current malaise?

| More on:
A woman sits at her home computer with baby on her lap, and the winning ticket in her hand.

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

When a S&P/ASX 200 Index (ASX: XJO) stock that's often listed as a staple by experts is suffering from a short-term dip, it's only right to consider adding it to one's portfolio.

And that's precisely the situation we find with Lottery Corporation Ltd (ASX: TLC) at the moment.

The share price has plunged more than 11% since the August reporting season.

Fairmont Equities managing director Michael Gable thus analysed it this week to see whether it's worth buying right now:

Why did Lottery Corp shares tumble?

The reason for the plummeting stock price was recent underperformance in the lotteries business.

Just like its customers, luck had much to do with this.

"Unfavourable jackpot outcomes had a meaningful impact on turnover for the lotteries division," said Gable on the Fairmont blog.

"Powerball tracked close to the statistical model. However, Oz Lotto experienced a highly unfavourable 1-in-20-year jackpot run."

And as the lotteries business brings in 85% of earnings before interest, taxes, depreciation, and amortisation (EBITDA), the Keno arm was never in a position to offset those losses.

Can the stock price recover?

However, the simple fact remains that Lottery Corporation holds lottery licences in all Australian states and territories except for Western Australia.

And since synthetic lotteries were banned in Australia a few years ago, those licences give Lottery Corp a monopoly in all those markets.

According to Gable, the company's margins are set to expand even though wage and marketing inflation will eat into earnings.

"Despite the expectations for higher costs, EBITDA margin expansion at a group level is still expected in FY24/25 from two avenues: an earnings boost from increased retailer commissions and the resumption of digital penetration."

For these reasons, Gable expects the shares to climb again.

"[Negative] sentiment is likely to reverse as the market begins to look through the FY23 result and instead focus on several strong fundamental drivers," he said.

"These include the normalisation of the jackpot cycle in FY24 and the potential for margin expansion."

A sweetener is a fully franked 3% dividend yield.

"It… seems that we have a significant low for now. TLC, therefore, looks like a buy at current levels."

Motley Fool contributor Tony Yoo has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has positions in and has recommended Lottery. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

More on Share Fallers

a woman holds her hands to her temples as she sits in front of a computer screen with a concerned look on her face.
Share Fallers

Why Mesoblast, Navigator Global, Polynovo, and Skycity shares are falling today

These shares are having a tough finish to the week. Why are investors selling their shares?

Read more »

Three guys in shirts and ties give the thumbs down.
Share Fallers

Why Boss Energy, Core Lithium, Mesoblast, and QBE shares are falling

These ASX shares are falling. But why?

Read more »

A male investor wearing a blue shirt looks off to the side with a miffed look on his face as the share price declines.
Share Fallers

Why Evolution, Galan Lithium, Life360, and Resolute shares are dropping today

These ASX shares are missing out on the good times today.

Read more »

A young male investor wearing a white business shirt screams in frustration with his hands grasping his hair after ASX 200 shares fell rapidly today and appear to be heading into a stock market crash
Share Fallers

Why Capricorn Metals, Core Lithium, Life360, and Mesoblast shares are dropping today

These ASX shares are having a tough time on Tuesday.

Read more »

plummeting gold share price

Own ASX gold shares? Here's why you're having a horrible day

If you own ASX gold shares, you won't be too happy right now.

Read more »

A young woman holds an open book over her head with a round mouthed expression as if to say oops as she looks at her computer screen in a home office setting with a plant on the desk and shelves of books in the background.
Share Fallers

Why Brainchip, Origin, Sayona Mining, and Stanmore shares are sinking today

These ASX shares are starting the week in the red.

Read more »

Person with thumbs down and a red sad face poster covering the face.
Share Fallers

Why Core Lithium, Harvey Norman, TechnologyOne, and Tyro shares are dropping

These ASX shares are ending the week in the red.

Read more »

A woman with short brown hair and wearing a yellow top looks at the camera with a puzzled and shocked look on her face as the Westpac share price goes down for no reason today
Share Fallers

Why Cettire, Lake Resources, Origin Energy, and Wildcat shares are sinking

These ASX shares are under pressure today. But why are investors hitting the sell button?

Read more »