Betting and gaming company William Hill (LSE: WMH) may not be among the most popular of income stocks. However, its 4.4% yield has considerable appeal and today’s trading statement shows that it’s making encouraging progress. 

William Hill’s trading statement confirms that it’s on track to meet its guidance for operating profit to be at the top end of the range of £260m-£280m for the full year. Its online division has returned to growth, with UK Sportsbook amounts wagered up by 4% in the second half of the year following mobile Sportsbook enhancements earlier in the year.

Alongside this, William Hill has completed the rollout of 2,000 proprietary self-service betting terminals. Its organisational structure changes are also on track for implementation in 2017, while in the second half it has focused on improvements to its gaming and marketing functions. In fact, it has identified opportunities for £30m of operating efficiencies in 2017, with £15m of digital marketing spend already identified to drive faster digital net revenue growth.

In terms of its international performance, William Hill continues to record positive performance outside of the UK. It recorded double-digit wagering and net revenue growth in H2 in Australia, the US and Spain. This should help to diversify the business and lower the company’s risk profile. It also improves its income appeal, since it helps to makes it a more robust dividend payer.

In terms of its dividend coverage, William Hill’s shareholder payouts are currently covered 1.8 times by profit. This shows that there’s scope for dividends to rise at a faster pace than profit over the medium term. Furthermore, William Hill is forecast to increase its bottom line by 10% in the next financial year, which should have a positive impact on dividend payments over the medium term.

Superior dividend

Alongside its more geographically diversified and improved business model, this shows that William Hill remains a sound income play. It offers a superior dividend outlook to sector peer Ladbrokes Coral (LSE: LCL), which currently yields 2.5% from a dividend covered 2.1 times by profit. This shows that while Ladbrokes Coral has the potential to increase dividends as the company integrates following the merger, William Hill offers a superior income outlook.

Clearly, Ladbrokes Coral has the potential to become a dominant player within the betting and gaming markets. The merger between the two companies has created a more financially sound and resilient business that may prove to have cost advantages over sector peers. However, with William Hill having a high yield, dividend growth potential and earnings growth prospects via its international businesses in particular, it remains an appealing income play.

Whether it’s the most underrated income stock in the world remains unclear but it certainly deserves a closer look. There are a number of 4%-plus yielding shares which are under the radar of many income-seeking investors. Nevertheless William Hill is underrated as an income play and could prove to be increasingly popular over the medium term as low interest rates plus high inflation become a reality.

The post Is this the most underrated dividend stock in the world? appeared first on The Twelfth Magpie.

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Peter Stephens has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

Powerful results…

Helped by the drop in sterling and a strong end to this summer’s Euro 2016 football tournament, the market’s largest betting and gaming company saw a 25% growth in Q3 revenue to £404m. With operating profit jumping by 68% to £95m, earnings are now expected to hit £390m-£405m for the year, significantly higher than its previous estimate of £365m-£385m.

The merger between Paddy Power and Betfair back in February also appears to be progressing well with CEO Breon Corcoran suitably buoyant: “Work is underway to combine the best of Betfair and Paddy Power’s technology into a multi-brand, multi-channel, multi-jurisdictional platform that will start to unlock the full potential of the group’s scale and will lead to increased pace of development and faster roll out of new products.”

Whether everything continues to progress so smoothly remains to be seen. However, this is an undeniably positive update from the Dublin-based company, further cementing its status as the clear favourite in a group of highly competitive runners. With figures like these, it’s easy to understand why, on a forecast price-to-earnings (P/E) ratio of just under 21, shares in Paddy Power Betfair aren’t cheap compared to market peers Ladbrokes (15) and William Hill (12), even if the company has lost roughly 11% of its value since issuing its interim figures back in August. 

…but poor odds?

Regardless of whether shares in Paddy Power Betfair appeal however, I believe the hyper-competitive nature of the gambling industry and the threat of further legislation sufficiently weaken the investment case for holding any bookie as part of a strategy to Brexit-proof your portfolio. 

True, if there’s safety in scale, Paddy Power Betfair more than ticks the box. With a market cap of £7.3bn, 600 betting shops, operations in the US and Australia and two of the biggest online sites in Europe, the company towers above its main competitors. That said, the question is whether this dominance will be sustained given the flurry of activity in the industry over the last year that looks set to continue in the future. While today’s update might not make pleasant reading for its rivals, let’s not forget that Ladbrokes and Gala Coral completed their merger this week and will be even more committed to drawing customers to their doors. After many false starts, William Hill might also strike a deal with another company in the sector, thereby offering its investors some hope that it can return to winning ways.

This is before the likelihood of more legislation is even considered.  Following an estimate that 600,000 people engage in problem gambling, there’s now the strong possibility the government will revise its laws on fixed betting machines, thereby hurting the profits of those with a significant presence on the high street (including all three listed businesses mentioned above).  If a review suggests that the current maximum stake of £100 is no longer acceptable (along with the prizes offered), things might just get even tougher for our nation’s bookmakers.

The post Should you buy a bookie for Brexit? appeared first on The Twelfth Magpie.

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Paul Summers has no position in any shares mentioned. The Motley Fool UK has recommended Paddy Power Betfair. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

Source: Castellian Capital, FCA                       

For construction giant Carillion, traders’ negativity comes from several years of tepid revenue growth and stagnant earnings even as the company switches to supposedly higher margin services contracts. Net debt may be falling but until Carillion has improved margins and earnings I won’t be going long on the cyclical builder.

Grocer WM Morrison (LSE: MRW) shares have been a favourite short position for years as continued price wars have decimated profits for all major grocers. While the company’s turnaround is bearing fruit, falling market share and collapsing margins leave little room for shares to return to previous highs.

There’s a similar explanation for the struggles of online grocer Ocado (LSE: OCDO). Although sales continue to grow at a rapid clip the company has little pricing power and the entry of Amazon Fresh into the already crowded UK market doesn’t portend well for this relative minnow.

Take the problems of oil majors across the world then add in a 62% gearing ratio and the unpopularity of Tullow (LSE: TLW) is understandable. But with underlying operating costs per barrel of only $13.40, capital expenditure falling and production increasing significantly, the negativity around Tullow may be overblown.

Shake-ups in the gambling industry have investors betting heavily against the ability of Ladbrokes to adapt to lower footfall in high street shops, increased regulation of betting machines and a shift to online gambling.

Manufacturing pumps for oil producers and miners has made for a rough few years at Scottish engineer Weir. There are early signs of a recovery in capital expenditure in both industries but with 2016 expected to mark the fourth straight year of falling earnings, I won’t be taking the plunge on Weir just yet.

Brexit has been key to investor concern over the prospects for outsourcer Mitie (LSE: MTO), which blamed uncertainty over the referendum results for a profit warning in September. With businesses and government agencies evidently holding off on contracts until the dust settles I wouldn’t be betting on Mitie shares rocketing anytime soon.

Like Morrisons and Ocado, shrinking market share and increased competition from budget chains have hammered investor confidence in J Sainsbury (LSE: SBRY). Spending £1.4bn for troubled business Argos will only dilute management’s focus on turning around the core business. I expect rough seas ahead.

Plastics producer Victrex has become a target for short sellers due to falling sales to the oil & gas industry and regulatory scrutiny of its medical implants in the US. Long term though, being the market leader in a growth industry alongside stunning margins makes me think Victrex could be worth a closer look.

Woes in the oil & gas industry have also dented confidence in generator provider Aggreko. A profit warning late last year didn’t help and investors remain worried that continued weakness in emerging markets could spell trouble as debt rises.

The post Are the 10 most shorted shares on the FTSE 350 in your portfolio? appeared first on The Twelfth Magpie.

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Ian Pierce has no position in any shares mentioned. The Motley Fool UK has recommended Mitie Group, Victrex, and Weir. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

Ladbrokes was able to increase net revenue by 12.1% in the quarter. This represents its fourth successive quarter of net revenue growth, with the company’s margin benefitting from a strategic focus on a recreational customer base. This was despite poor horse racing festivals, with Ladbrokes experiencing losses at Goodwood and York. Much of this was offset by growth in BetStation and football, with the Euros helping to boost the company’s financial performance.

The merger with Coral has thus far progressed as planned. Ladbrokes has agreed to sell 359 shops and is close to completion of the deal. If it goes through, the merger should provide it with an improved size and scale advantage versus rivals. This could boost its financial performance and lead to greater stability in what has been a fast-changing industry.

End of the road

In terms of consolidation within the sector, Ladbrokes’ peer William Hill (LSE: WMH) has today announced that it has ended talks to merge with Amaya. This follows William Hill canvassing the views of major shareholders. William Hill is still on track to meet full-year expectations and will recommence its share buyback programme. It had been put on hold in July.

Looking ahead, Ladbrokes and William Hill have bright futures ahead of them. For example, in the next financial year Ladbrokes is forecast to increase its earnings by 18%, while William Hill’s bottom line is due to increase by 9%. Both of these figures are ahead of the expected growth rate of the wider index and show that despite high competition within the gaming and betting sector, both companies appear to have the strategies to deliver strong financial performance.

Furthermore, Ladbrokes and William Hill offer good value for money. In Ladbrokes’ case, it has a price-to-earnings growth (PEG) ratio of 1. This shows that it offers growth at a very reasonable price and is more appealing than William Hill’s PEG ratio of 1.4. As such, its shares could continue to outperform William Hill. So far in 2016 they are up by 17% versus a 21% decline for its sector peer.

Of course, William Hill offers a higher yield than Ladbrokes at 4% versus 2.3%. However, its dividend isn’t as well-covered as that of Ladbrokes at 1.8 versus 2.1. This shows that Ladbrokes’ dividend could increase at a faster rate than that of William Hill. Alongside its more appealing valuation, higher growth rate and more stable outlook in terms of moving ahead with the Coral merger versus continued uncertainty for William Hill, Ladbrokes is the better buy for the long term.

The post Should you buy this growth share after sales rise by 12%? appeared first on The Twelfth Magpie.

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Peter Stephens has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

GVC’s first half results show a rise in revenue of 8% as well as an increase in net gaming revenue of the same amount. This contributed to an increase in EBITDA (earnings before interest, tax, depreciation and amortisation) of 42% versus the same period of the prior year. This shows that the company’s strategy is working well and is delivering on its potential.

The strength of GVC’s brands was evidenced by the growth achieved despite its relatively low marketing spend. In fact, marketing costs amounted to just 21% of net gaming revenue, which is a high return on investment. Marketing spend also contributed to an increase in mobile sports wagers of 55%, while casino and games revenue rose by 98%.

Looking ahead, GVC believes that its organic growth strategy will work out as planned. The opportunities from the bwin.party acquisition are greater than expected and will be exploited through an increase in marketing investment. As such, GVC now believes that its performance for the full year will be towards the upper end of market expectations.

Ups and downs

GVC is forecast to report a fall in earnings of 23% this year, followed by growth of 89% next year. This puts it on a price-to-earnings growth (PEG) ratio of just 0.2, which indicates that it offers excellent value for money as well as significant upward rerating potential. This compares favourably to sector peer Ladbrokes which itself is undergoing a major transformation following a period of disappointing performance.

Ladbrokes is forecast to record a fall in earnings of 29% this year, followed by a return to growth of 19% next year. This puts it on an attractive PEG ratio of 0.9, but this is far less enticing than GVC’s PEG ratio. Therefore on a growth and valuation basis, GVC seems to be the better buy.

Furthermore, GVC offers superior income prospects to Ladbrokes. GVC isn’t due to pay a dividend this year, but next year it’s expected to yield 3.1% from a dividend that’s forecast to be covered 2.2 times by profit. This compares to a forward yield of 2.7% for Ladbrokes, which is due to be covered 2.1 times by profit.

Clearly, GVC and Ladbrokes are going through rapid change, but are expected to deliver improved financial and share price performance over the medium term. They both have relatively high risk profiles due to their changing business models. But based on their risk/reward ratios, they should make for sound investments. Although the two companies are worth buying, GVC has superior income, growth and value appeal and this makes it the better buy for the long term.

The post Why I’d buy GVC Holdings plc instead of Ladbrokes plc after today’s results appeared first on The Twelfth Magpie.

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• The CMC Markets share price is smashing the FTSE 100 in 2026. Is there an opportunity here?
• With a yield of 6.8% and a P/E ratio of 12.1, is this a dirt cheap FTSE 250 stock to consider?

Peter Stephens has no position in any shares mentioned. The Motley Fool UK has recommended GVC Holdings. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

Clear favourite?

Initially, the numbers look pretty good. Total revenue increased by 18% to £759m over the first half of the year with double-digit growth evident in all four of the company’s divisions (Online, Australia, Retail and US). Euro 2016 performance in the second quarter was a particular highlight. Nevertheless, one-off costs of almost £200m as a result of the recent merger put a damper on things, prompting the company to report an operating loss of £47.5m for the half. Shares dipped almost 3% on the news.

CEO Breon Corcoran stated that the company had “sustained good momentum through a period of considerable change“. He also reflected that the merger between Paddy Power and Betfair was now “largely complete” and that “synergies are being delivered ahead of schedule“, the benefits of which will be felt in 2017. Despite acknowledging the highly competitive industry that Paddy Power Betfair operates in, Cocoran stressed that the company’s strong market position and increased scale should mean that consistent growth is on the cards for the foreseeable future.

I suspect he might be right. The question investors need to ask, however, is whether the shares are still worth buying given Paddy Power Betfair’s high forecast price-to-earnings (P/E) ratio of 27. Perhaps the best way to decide is to scrutinise the fortunes of two of its biggest competitors.

Rank outsider?

While Paddy Power Betfair’s results are something of a mixed bag, its investors are possibly less concerned than those holding shares in William Hill (LSE: WMH). Having become increasingly bemused by the company’s apparent lack of direction over the last year, I wasn’t surprised by its rejection of a joint £3.6bn bid by Rank and 888 and the ousting of CEO James Henderson in July.

The next few weeks could be crucial. Rumours are now circulating of two new takeover bids being prepared, one from Australian businesses Tabcorp and Tatts Group and another from a private equity group. An announcement that the company is seriously considering an offer could see the share price spike.

But while new takeover bids are certainly very possible, they aren’t guaranteed. Moreover, the company’s recent statement that earnings will be at the top end of expectations could be overly optimistic. With its shares on a forecast P/E of 14,  it’s a lot cheaper to buy a slice of William Hill. For me, however, this feels like a speculative investment at the current time.

Dark horse?

After a few rotten years, holders of Ladbrokes (LSE: LAD) have been celebrating something of a winning streak lately. Its share price is up almost 50% since late June in anticipation of its merger with Coral. Should this proceed smoothly and earnings improve, things could get even better for the Harrow-based bookmaker.

Nevertheless, like its FTSE 100 peer, shares in Ladbrokes now trade on a fairly high forecast P/E of 21, suggesting that for now at least, investors may find better value elsewhere. A dividend yield of under 2% is also unlikely to tempt income hunters. Given this, and the uncertainty surrounding William Hill, my money’s on the biggest player on the field.  

The post Is Paddy Power Betfair still the best horse to back after today’s results? appeared first on The Twelfth Magpie.

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• With a yield of 6.8% and a P/E ratio of 12.1, is this a dirt cheap FTSE 250 stock to consider?

Paul Summers has no position in any shares mentioned. The Motley Fool UK has recommended Paddy Power Betfair. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

Mondi

Packaging and paper specialist Mondi (LSE: MNDI) has released an upbeat set of results for the first half, with its underlying operating profit rising by 8% on the year. Furthermore, underlying earnings have risen 11%, with operating cash flow up 15% and return on capital employed at an impressive 21.2%.

Looking ahead, Mondi’s strategic acquisitions should enhance the performance of its packaging portfolio, while its capital projects continue to deliver strong growth potential. However, with it forecast to record a rise in earnings of just 3% next year, its current valuation appears to be rather generous. It trades on a price-to-earnings (P/E) ratio of 13.5 and with its shares yielding 3%, it lacks income appeal – especially when dividends are due to rise by just 3.3% next year.

Therefore, while Mondi is performing well as a business, it seems to lack that 30%-plus upside. As such, it may be worth awaiting a lower share price before buying it.

Pets At Home

Also updating the market today was Pets At Home (LSE: PETS). The pet food and product retailer’s first quarter update shows that it’s making encouraging progress, with like-for-like (LFL) sales rising by 2.7%. They were driven by Advanced Nutrition, omnichannel, vet and grooming services, as well as a return to positive sales figures for the company’s Health & Hygiene products.

This strong LFL performance meant that Pets At Home’s total sales rose by 8.9%, with four new retail outlets, three veterinary practices and six grooming salons opened during the period. Allied to this growth was a rise of 200,000 in Pets At Home’s VIP club members, with the total number now standing at 3.5m and offering repeat sources of sales.

Pets At Home is forecast to record a rise in net profit of 4% next year, which is somewhat disappointing as it’s lower than the wider market’s expected growth rate. Weakness in the UK economy could be a key challenge for Pets at Home and with its shares trading on a P/E ratio of 15.8, the chances of a 30% share price rise seem somewhat slim.

Ladbrokes

Meanwhile, shares in betting company Ladbrokes (LSE: LAD) are flat today after the release of its half-year results. They show a 13.1% rise in sales as well as an increase in earnings of over 41%. This shows that the company’s customers are responding positively to Ladbrokes’ new strategy, with its marketing spend and accelerated delivery on its multi-channel programme generating strong growth in staking, actives and sales.

Of course, Ladbrokes admits in today’s update that it has enjoyed favourable sporting results and that customer-friendly results will inevitably return in the future. However, with its merger with Coral going ahead as planned and its balance sheet looking healthier following a reduction in net debt to £227m, its long-term outlook remains positive.

With Ladbrokes trading on a price-to-earnings growth (PEG) ratio of just 0.7, it seems to offer a favourable risk/reward ratio. While Brexit may hurt its near-term performance, Ladbrokes nevertheless offers at least 30% upside over the medium-to-long term based on its improving performance and low valuation.

The post Will these 3 shares soar or sink after today’s updates? appeared first on The Twelfth Magpie.

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Increasing competition for Ocado

Ocado (LSE: OCDO) has been under pressure for some time now. Increased competition from companies such as Amazon and Uber has made investors doubt whether Ocado can be a success. The thin margins Ocado operates on give the company little room for manoeuvre and competing against companies with seemingly endless amounts of capital will be tough. Worryingly, the company has been borrowing more and using lots of cash to develop the business. 

I’m still doubtful of the business model and the £1.5bn market cap looks insane to me. There has been much talk of a takeover attempt coming from a big rival but I can’t see Amazon coming along and spending billions on a small operation. It seems as if many financial professionals are betting on Ocado to fall and shares have indeed fallen 40% in the last year. The shares have been on a steady decline since early 2014 and I see no reason why it won’t continue. 

Transformational merger

Ladbrokes (LSE: LAD) is on the verge of completing an impressive merger with Coral Group. The enlarged business will be a market leader and own just under 4,000 betting shops. Recently the company got the all clear on the deal from the Competition and Markets Authority provided the company sells 300-400 shops. This should be a simple transaction for the company and I expect it to go through without a problem. 

The deal will create £65m of cost synergies per annum and boost online growth for Ladbrokes. This is key going forward as the online segment is where Ladbrokes has historically struggled. The company currently pays a chunky dividend yield of over 4% and looks set to post some impressive earnings growth in the next few years. 

Flying takeaway

Online company Just Eat (LSE: JE) is moving from strength to strength at the moment. In the last three months shares are up 17% and I believe they could go much further. The company has already upgraded earnings forecasts for 2016 once and could easily do it again. The shares are trading on a forward price-to-earnings ratio (P/E) of just 29 for 2017. To me, this is relatively cheap for a growth company with the potential of Just Eat. 

The company also benefits from first-mover advantage. Just Eat was the first company to get into the online takeaway space and any competitors will find it incredibly hard to displace Just East at the top. In my opinion Just Eat could see another 20% increase in its share price this year if targets are met. 

Looking at the short interest in stocks is a valuable exercise in my investment research and I would recommend all private investors use the FCA resource.

The post Should you avoid some of London’s most shorted stocks, Ladbrokes plc, Ocado Group plc and Just Eat plc? appeared first on The Twelfth Magpie.

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Jack Dingwall has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

Gambling merger

Gambling company Ladbrokes (LSE: LAD) is on the brink of a transformational acquisition of Coral Group. This integration will create the UK’s largest licensed betting office estate and make over £65m of cost synergies per annum. The merger is currently being analysed by the Competition and Markets Authority but the market expects the acquisition to be given the OK shortly. Providing the deal goes through, the company looks somewhat undervalued compared to peer Betfair, which is trading on 25 times earnings. In the Q1 2016 trading statement group revenue was up over 10% year on year, and importantly digital revenue was up over 36% — this is an area where Ladbrokes trails rivals. The company should see earnings per share rise substantially next year and the shares should really be trading around the 200p mark at the least. 

Oil recovery

Oil favourite Tullow Oil (LSE: TLW) looks like the perfect stock for investors looking to play the oil price rise. The company produces over 65,000 bopd mainly from large developments in Africa. Tullow has a net debt of $4.5bn but ample headroom with over $1.3bn in unused debt capacity and free cash. Tullow is planning to bring the TEN development online in July/August of this year and the company believe the annualised 2016 production of TEN will be 23,000 bopd (net 11,000 bopd). This increased production should help Tullow keep debt capacity low by the increase in cashflow coming into the company. Tullow is also drilling exploration wells in Africa and Europe which could act as small catalysts for the share price in the future. For obvious reasons the share price is heavily linked to the oil price, and I think that Tullow is one of the best ways to play the increasing oil price.

Flying high

Today easyJet (LSE: EZJ) released its May 2016 passenger statistics and shares are down by just over 1%. The company saw a 5.7% year on year increase in passengers which is encouraging especially in a month with a major air disaster. easyjet released half year results on the 10th May which were impressive and indicated to me the business could have a great year. The company made a loss of £24m but this was due to an adverse currency impact and the company made a constant currency profit of £5m. This half of the year is by far the weakest so any profits over this time are great going forward. Passenger number were up by 7.4% and the company returned over 55p a share to shareholders in the form of dividends over the six months. easyJet trades on a price to earnings ratio of only 10 and pays a hefty dividend and this is why I prefer the stock to rival Ryanair. 

These three shares could all substantially outperform the market over the next year or two. Share prices may begin to rise following the EU referendum as fund managers that have been avoiding UK mid/large cap companies will begin to invest in the index again. 

The post Why Ladbrokes plc, Tullow Oil plc & easyjet plc may offer outstanding growth appeared first on The Twelfth Magpie.

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The main condition for the deal is that the combined group will have to sell up to 400 shops. That represents about 10% of the two group’s total of 4,004 shops in the UK. It shouldn’t be a big problem.

If the merger goes ahead, Ladbrokes and Coral expect to be able to make cost savings of at least £65m per year. Given that Ladbrokes’ pre-tax profit was just £52.5m last year, that’s a significant saving. Online growth is also expected to accelerate.

However, I think it might make sense to wait until after the merger has completed before considering an investment in Ladbrokes. The firm will take on £1.35bn of debt and nearly double its share count to fund this deal.

It’s not clear to me whether the current share price offers good value, so until I know more, I’m staying away.

Hidden value in this bank?

Shares in Royal Bank of Scotland Group (LSE: RBS) have surged higher over the last week, climbing 19% to 250p. The trigger for the gains seemed to be a rather technical announcement on Tuesday relating to the issue of £85m of new shares.

In short, RBS seems to be selling new shares to partially offset the cost of interest payments on some of it debt. This will help protect the firm’s CET1 ratio of 15.5%, which is one of the highest in the UK banking sector.

To be honest, I’m not sure whether this news was the reason for RBS’s big gain this week. But I can see that the stock remains a classic value play. The shares trade at a 30% discount to their tangible net asset value of 352p, and RBS has an increasingly strong balance sheet.

RBS investors will need to be patient, but with the shares now trading on just 11.5 times 2017 forecast earnings, I think further gains are possible.

Buyback boost as market booms

Automotive retail group Pendragon (LSE: PDG) — which includes luxury dealer Stratstone and volume-seller Evans Halshaw amongst its dealerships — laid its cards on the table this week. The company said that it had been unable to find suitable acquisition targets, and would therefore be launching a £20m share buyback programme to return cash to shareholders.

Companies are often tempted into buyback programmes when their shares look expensive. Arguably, that’s the case here. Car dealers have enjoyed boom conditions since 2012 and Pendragon’s share price has tripled over the last four years.

However, the firm’s shares don’t look too expensive relative to earnings. At 41p, they trade on a multiple of 13 times five-year average earnings, and a 2016 forecast P/E of 10.5. There’s a risk that car sales are nearing a cyclical peak, but even if they are, car dealers should still have a strong pipeline of servicing and repair work for cars under warranty.

Personally, I’d rather see Pendragon’s management using this cash to reduce debt, ahead of any future downturn. Earnings per share growth is expected to fall to a pedestrian 4.5% next year. I think there are better choices elsewhere.

The post Will this week’s winners Royal Bank of Scotland Group plc (+19%), Ladbrokes plc (+18%) & Pendragon plc (+17%) continue to rise? appeared first on The Twelfth Magpie.

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Roland Head has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.