BUSINESS

Grab up NetEnt before it recovers

TAGs: Editorial, netent

There are still some great value stocks out there in the gaming sector. Despite all the instability within core gaming markets including the UK, Macau and the Las Vegas, safe places to park money long term and wait without much worry still exist. If you have a time horizon of 5-10 years or longer and want to build some wealth without trading in and out and sweating over daily price movements and political shakeups, here’s your checklist:

1) Stock at or near lows. You can’t buy low, after all, without actually buying low. Shares should be at lows for external reasons, having nothing to do with the company itself. Gambling companies are hit all the time with regulatory surprises, new taxes, punitive measures involving problem gamblers and protection schemes, problems obtaining licenses for one reason or other, etc. As long as the ruling reason for a decline in the stock is external to the company, it’s a buying opportunity

2) High dividends with little to no danger of suspension. They can wobble from quarter to quarter, but basically they’re there to stay. If the company is still making good money despite regulatory issues, even if it’s making less money than before, chances are good that it will eventually recover.

3) Iron balance sheet. Debt-fueled growth is only a good strategy if it’s short term in order to take advantage of opportunities that come around only rarely. In today’s super-cheap-money world, we see way too many companies that incorporate debt into their business models intrinsically and just keep rolling it over. It can keep their shares high for a long time but not forever. If you’re a trader, these sorts of momentum plays are nice to play around with. If you’re looking for a place to park capital and forget about it, move on with your life and check back when you’re retired, then not so much.

Grab up NetEnt before it recoversOne stock that hits all these points is Sweden’s NetEnt. It’s at 5 year lows for reasons that have nothing to do with how it operates. The decline it’s been in since 2016 has pushed its dividend yield to over 8%. Regulatory revamps in Sweden have shredded sentiment in the stock. Payment blockings, bonus restrictions, and player self-exclusion regulations that require the option to be front, center and obvious on their games have been eroding its top line. The company had to leave the Swiss market recently because of regulatory issues as well. While regulations attack the top line, higher taxes have been eating into its bottom line.

And yet, zooming out and looking at 4-year trends, NetEnt keeps making more and more money every year. Net income is up 54% since the end of 2015, back when the stock was at levels 184% higher than it is now. This is what extreme undervaluation looks like and it won’t last. In broad strokes, the regulatory quagmires that NetEnt has been caught in really haven’t affected company fundamentals. What they’ve done is sour momentum investors who want a quick growth fix so they can move on to the next trade. At this point though, it looks like the supply of sellers is exhausted, or it’s about to be.

NetEnt is one of the few gaming companies with no debt. If and when its overleveraged peers start to fall or at least encounter high enough stress that they are forced to sell assets in a liquidity crunch, NetEnt will be able to capitalize quickly. Once investors realize this in the context of any wider bear market, a firm bid should be placed under the stock as the reality sets in that that most of the decline has already happened.

New Jersey is one of its strongest growth markets and Pennsylvania operations are being launched. They’re also launching a share buyback program, probably spurred by all the regulatory beatings to help shareholders recover some value. The key is, NetEnt can actually afford this and they’re not just issuing debt so they can inflate their buyback programs in some kind of investor sugar rush. They have the cash, they’re making money, why not buy back some stock to ease some the pressure off investors?

Let’s try to imagine a worst case scenario. Let’s say the United Kingdom leaves the European Union without a deal in October the whole EU disintegrates by 2021. The Euro collapses, but Sweden has its own currency as does the UK. They both survive and domestic purchasing power rises. All NetEnt’s markets get cut by, say, 40% and NetEnt makes its smallest profit in the last 5 years. NetEnt stock gets cut in half, even though it’s already down 70% from highs. Meanwhile, lock in a dividend yield of 8% and 5 years from now you’re up 47% just by dividend reinvestment. Your downside is pretty much protected even in a worst case scenario. Even if dividends are suspended for a year while the market sorts out the bodies, you’re still up about 36% from dividends. There just isn’t much of a downside case if you’re going to hold this stock long term.

Sweden has its debt under control, at lows compared to its economy at below 40%. The one issue is its interest rate, still at negative, but Germany and Switzerland are also in the same boat. Is the bottom finally in? Who knows? Again, even if shares are cut in half from current levels, a long term hold of 5 years or longer should work out well.

Comments

views and opinions expressed are those of the author and do not necessarily reflect those of CalvinAyre.com