WSJ article

[The_Scout]

Anyone with a WSJ subscription want to check out the online gambling article here (http://online.wsj.com/public/page/2_0434.html?mod=topnav_2_0433)?

Hard to say whether there will be anything interesting in there, but it might be worth a look.

[DespotInExile]

Investors in Online Gambling
May Feel More Pain Before Gain
October 23, 2006

Two weeks after lawmakers pulled the plug on U.S. online gambling, the smoke is starting to clear. Shares in big listed groups like PartyGaming, Sportingbet and 888 Holdings have fallen as much as 75% on the realization that $2 billion of revenue may be gone for good. But there's still much to play for -- if investors accept some important new rules and prepare for some short-term pain.

First, the investment story has changed. Online-gambling stocks were largely a high-stakes punt on U.S. legality. Now they are a bet on non-U.S. growth. That looks steady enough, at around 17% a year, according to PricewaterhouseCoopers.

Of course, there are still risks in Europe. Countries like France, Germany and Sweden are placing obstacles in the way of online-gambling groups. But unlike the U.S., their objection is a financial one. In effect, they want to protect tax revenues from their own state monopolies. Sooner or later, gambling groups are likely to offer a compromise, and governments will face pressure from Brussels to accept.

Second, the shareholder base is likely to change. Some investors, such as more risk-hungry hedge funds, will start to lose interest. PartyGaming will lose its FTSE-100 tracker funds, too. But institutions after a lower-risk growth story -- including U.S. funds and banks -- should start to take a look. Eventually, that should reduce the stocks' volatility.

Still, valuations don't reflect the new reality. Take PartyGaming. Of the $1.5 billion in global revenue analysts expected for next year, say it now gets $300 million, or 20%. Margins will have to come down too, to around 35% from near 60%. That means around $100 million of operating profit. At its current share price, that equates to a toppy 23 times next year's earnings.

But, hang on -- if the companies are likely to start paying tax, shouldn't that be factored in, too? Sure, they may not end up paying the 30%-plus that other companies do. But factor in even 15%, and PartyGaming's rating shoots to nearly 30 times earnings. That is up there with Google, which trades on 33 times, according to JCF Factset. Gambling investors should brace themselves for a further haircut