The share price of Tabcorp Holdings Limited (ASX: TAH) fell another 1% to a four-month low of $4.51 following its disappointing half year announcement last week but this dog could find some love after UBS upgraded the stock.
As the saying goes, everything has got a price and Tabcorp's 12% fall from grace since last Thursday's unwelcomed results has put the stock deeper into value territory, as long as you believe it faces cyclical and not structural challenges.
The gambling company reported a 20% plunge in normalised interim net profit to $82 million no thanks to weakness in its Sun Bets and Wagering businesses. This was below the market's expectations.
Sun Bets isn't the bigger worry though as UBS believes that a restructuring in the business will help address some of the issues, but it's the ~$20 million earnings before interest, tax, depreciation and amortisation (EBITDA) miss for wagering that is trickier to reconcile.
The company's horse racing revenue has slowed to -2% in the December quarter despite the Melbourne Cup falling in November. This compares to a 6% increase in the September quarter.
"While the earnings miss was disappointing, we don't consider this to be a definitive sign of systemic issues in the business," said UBS who upgraded the stock to "buy" from "neutral".
"We'd also highlight the earnings miss was entirely driven by Tabcorp wagering, which represents 1/4 of sustainable EBIT, with the rest of the business performing in line with expectations."
The problem with the Wagering business though is that until other competitors report their results, it is hard to know if there is a structural problem with the division as online betting agencies have joined the race to fight for market share. The competitors include CrownBet, which until recently was co-owned by Crown Resorts Ltd (ASX: CWN).
However, UBS is willing to bet that the contraction in Tabcorp's wagering business will not persist and the broker is pencilling in low-single-digit growth for the division over the next 12 months.
What's more, the broker thinks the integration with Tatts is proceeding well and Tatts is performing better than many had feared under its new owner.
UBS added that management's anticipated gains from synergies seem realistic while the regulatory environment is improving and the company's dividend looks sustainable.
The stock is trading on a dividend yield of 5.1% (before franking) based on the broker's FY19 forecasts and UBS has a 12-month price target of $5.20 on the stock.
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