The Motley Fool

Should You Gamble on Amaya Inc. or Great Canadian Gaming Corporation?

Every time I go to Las Vegas, I get a little more convinced that every investor should have exposure to the gambling sector in their portfolio.

It’s absolutely astounding how slot machines and table games can turn smart, practical people into nothing more than zombies who are content to keep playing until their money runs out.

That’s a great business, and I want a piece of it.

The only problem is the competition in Las Vegas. Rooms are given away for practically nothing during slow times, and it seems like there’s always another new mega project ready to open up that takes away profits from the incumbents. It’s little wonder why many of the dominant names have moved from Las Vegas to other markets. But even that market is showing obvious cracks, as the growth in casinos has been met with a decline in visitors.

Fortunately for investors, there are two solid choices in the sector right at home: Amaya Inc. (TSX:AYA) and Great Canadian Gaming Corporation (TSX:GC). Let’s take a closer look at both.

Amaya

In 2014, Amaya made headlines when it swallowed up Rational Group, the parent company of PokerStars and Full Tilt Poker, two of the largest platforms for online poker. The company paid US$4.9 billion for the transaction.

PokerStars is the dominant platform, with a market share approaching 60%. If you’re serious about playing online, you play at PokerStars. That type of market share creates a pretty serious moat.

Plus, there’s plenty of potential growth. In the near term, the company looks to offer both sports betting and table games, both of which proved popular during a recent trial for customers in Spain. The company captured a double digit market share in both categories, only offering an optional download for existing players. Imagine what it can do with a full marketing push.

The long-term potential is some sort of legalization of online poker in the United States. Nevada, New Jersey, and Delaware have legalized online poker, but games at the state level will never move the needle. There needs to be a nationwide legalization. Observers of the industry say it’s only a matter of time, but nothing is imminent.

Considering the company is trading at just 15 times 2015’s projected earnings of $1.92 per share, investors aren’t even paying an excessive multiple for the company.

Great Canadian Gaming

Unlike Amaya, Great Canadian Gaming is involved in the traditional casino business. It owns 10 casinos and seven horse racing tracks, and stretches across Canada and Washington State.

2014 was a good year for the company. Revenue increased 10% to $446 million, while earnings also jumped, increasing from $0.90 per share to $1.12. The balance sheet is solid as well, with cash on hand of $324 million, compared with long-term debt of $442 million.

As the largest casino operator in the country, Great Canadian enjoys a good relationship with government regulators. This makes it one of the ideal companies for expanding or buying competitors, at least from the government’s point of view. It also holds a dominant position in the Vancouver market, as well as having a fleet of casinos that are relatively new and hold long-term licence agreements with regulators. Additionally, it also stands to benefit as the Canadian dollar continues to weaken.

To grow, the company must either build new properties or make an acquisition. The casino market in Canada does have potential to be consolidated, and provinces like Saskatchewan that have publicly owned casinos may look at privatization, especially if revenues from oil and gas don’t recover right away. Provincial governments eager for gaming revenues will likely green light new developments that make sense too.

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Fool contributor Nelson Smith has no position in any stocks mentioned.

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