One Thing To Consider Before Buying Tabcorp Holdings Limited (ASX:TAH)
For Tabcorp Holdings Limited’s (ASX:TAH) shareholders, and also potential investors in the stock, understanding how the stock’s risk and return characteristics can impact your portfolio is important. Every stock in the market is exposed to market risk, which arises from macroeconomic factors such as economic growth and geo-political tussles just to name a few. This is measured by its beta. Not every stock is exposed to the same level of market risk, and the broad market index represents a beta value of one. A stock with a beta greater than one is expected to exhibit higher volatility resulting from market-wide shocks compared to one with a beta below one.
Check out our latest analysis for Tabcorp Holdings
What does TAH's beta value mean?
Tabcorp Holdings's beta of 0.58 indicates that the stock value will be less variable compared to the whole stock market. The stock will exhibit muted movements in both the downside and upside, in response to changing economic conditions, whereas the general market may move by a lot more. Based on this beta value, TAH appears to be a stock that an investor with a high-beta portfolio would look for to reduce risk exposure to the market.
Does TAH's size and industry impact the expected beta?
With a market capitalisation of AUD $3.53B, TAH is considered an established entity, which has generally experienced less relative risk in comparison to smaller sized companies. However, TAH operates in the hotels, restaurants and leisure industry, which has commonly demonstrated strong reactions to market-wide shocks. As a result, we should expect a low beta for the large-cap nature of TAH but a higher beta for the hotels, restaurants and leisure industry. This is an interesting conclusion, since its industry suggests TAH should be more volatile than it actually is. There may be a more fundamental driver which can explain this inconsistency, which we will examine below.
Is TAH's cost structure indicative of a high beta?
An asset-heavy company tends to have a higher beta because the risk associated with running fixed assets during a downturn is highly expensive. I examine TAH’s ratio of fixed assets to total assets to see whether the company is highly exposed to the risk of this type of constraint. Given that fixed assets make up less than a third of the company’s total assets, TAH doesn’t rely heavily upon these expensive, inflexible assets to run its business during downturns. Thus, we can expect TAH to be more stable in the face of market movements, relative to its peers of similar size but with a higher portion of fixed assets on their books. Similarly, TAH’s beta value conveys the same message.
What this means for you:
Are you a shareholder? You may reap the benefit of muted movements during times of economic decline by holding onto TAH. Its low fixed cost also means that, in terms of operating leverage, its costs are relatively malleable to preserve margins. I recommend analysing the stock in terms of your current portfolio composition before increasing your exposure to the stock.
Are you a potential investor? You should consider the stock in terms of your portfolio. It could be a valuable addition in times of an economic decline, due to its low fixed cost and low beta. However, I recommend you to also look at its fundamental factors as well, such as its current valuation and financial health to assess its investment thesis in further detail.
Beta is one aspect of your portfolio construction to consider when holding or entering into a stock. But it is certainly not the only factor. Take a look at our most recent infographic report on Tabcorp Holdings for a more in-depth analysis of the stock to help you make a well-informed investment decision. But if you are not interested in Tabcorp Holdings anymore, you can use our free platform to see my list of over 50 other stocks with a high growth potential.
To help readers see pass the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned.
