Punters gamble on PartyGaming following its figures, by Nick Fletcher - The Guardian - 11th March 2009

If the stock market is a casino, as critics often maintain, then the punters don't seem able to decide whether or not to back online gambling group PartyGaming.

Despite its full year results showing a 29% increase in earnings, the company's shares initially fell to 214.5p. But they have since recovered to 252.75p, a 21.5p gain.

Analysts seem equally unsure about the business. Evolution Securities issued a buy note, partly on the hope of what the company calls "a transformational acquisition." Evo said:

"[This prospect] remains a key plank of our buy case for Party despite the strong recent share price performance.

"A settlement with the US Department of Justice still seems to be just around the corner but may be largely in the price. Trading appears to be stabilising with a good performance in casino offsetting the declines in poker and plenty of distance still to go with improving the sportsbook. Although the valuation is beginning to look full relative to the market we retain our buy rating and 284p price target because of the potential for value-creating M&A and because, on a relative basis, cash-generative and debt-free looks like an attractive investment proposition.

"There are reasons to be optimistic about the second half of 2009; the currency impact will unwind, new content will help drive casino business, B2B [business to business] relationships will be announced. This upside, plus the potential for sector consolidation, makes (debt free) Party look a better investment than much of the rest of the market."

However Collins Stewart is having none of this. It has advised clients to sell, saying:

"PartyGaming's full year results are in line with expectations, with increasingly difficult top-line offset by cost-cutting and currency hedge. Current trading looks respectable on face value with February to 4 March up 6.5% on January. However, this is still 13.5% below last year, reinforcing our -10% revenue forecasts for 2009. Moreover, growth is all casino and sports, with the latter likely to be volatility rather than fundamentals.

"During 2008, a combination of cost cutting and the natural currency hedge resulted in earnings slightly ahead of expectations. We doubt this can be repeated in 2009 for two reasons. First, marketing is the life-blood of the B2C [business to consumer] business: cutting it in absolute terms, even with cheaper media, is likely to exacerbate top-line problems and erode market position further. Second, the need to improve content and drive B2B business means staff/content costs are unlikely to be cut and could increase.

"There is no meaningful update from the DoJ and, if anything, the language used is less sanguine than in recent history. This does not surprise us and we reiterate our view that any 'settlement' is unlikely to provide a benefit to US liberalisation. Further $70m cash is hardly an inspiring war chest for M&A. Given our US and European regulatory concerns (eg, France) as well as continued difficult trading, we see Party's premium as unjustified."

The overall market too is struggling for direction. Despite an opening rise on Wall Street on revived hopes of a successful bailout for US banks, the FTSE 100 has slipped 15.02 points to 3700.21 after earlier touching 3763. (Credit: The Guardian)

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