Last week, in the wake of Glorious Goodwood and ahead of the York Ebor Festival, the UK’s sports betting and gaming stocks were in the news.
The big FTSE 100 players, Flutter Entertainment (LSE: FLTR) and Entain (LSE: ENT), both issued their half-year results. And boy, did they make a splash.
The week also brought news of a contraction in the UK economy, fuelling expectations of a recession. ‘Sin stocks’, like fags, booze and bookmaking firms, are often said to be resilient when times are tough. Could investing in Flutter and Entain be a smart move for investors?
Entain was first up with its results, which were issued on Thursday. On a down day for the market, the stock headed the blue-chip leaders board with a rise of 3.7%. It gained a further 4.1% on Friday.
Flutter Entertainment, which released its results on Friday, topped the leaders board that day, bolting home with an impressive surge of 14.1%.
Despite these gains, both stocks are down on a 12-month view. Entain by 27.3% and Flutter by 23.4%. And the declines look worse set against the Footsie, which has put on 8.2% over the period.
However, extend the timescale further still — to 10 years — and the two stocks have real thoroughbred pedigrees. Flutter has delivered an annualised 20.8% return and Entain 26.7%, compared with 6.5% from the Footsie.
You never meet a poor bookmaker
At a very basic level, the business of bookmaking is a simple and attractive one — at least for investors who have no moral objection to gambling.
You’re probably familiar with horse-racing betting odds: 7/4, 100/30, 6/1, and the like. All these fractional odds have a percentage equivalent. If the odds on a race were to total 100%, the bookmaker should break-even. If they were to total less than 100%, punters would be able to back every horse in the field and make a profit.
Bookmakers lay odds that total over 100%. In a three-horse race, or any three-outcome event (such as win-draw-lose on a football match), the ‘overround’, as it’s called, may be in the 105%-110% region.
However, the bigger the number of possible outcomes to the event, the bigger the overround tends to be. For example, on the Grand National it’s been as high as 165%. In this instance, for every £165 taken in bets, a bookie would expect to hand back around £100 to winning punters and pocket £65.
It’s not without reason that the saying “you never meet a poor bookmaker” has been around for donkey’s years. It all starts with the overround.
The status of Flutter and Entain as FTSE 100 stocks is a testament to the structural growth of the industry and the success of the two companies’ business strategies. They have some key things in common.
Both are consolidators in the industry, making multiple acquisitions. The brands accumulated under the Flutter umbrella include Betfair, Paddy Power and Sky Bet. Entain’s portfolio includes Coral, Ladbrokes and Sportingbet.
Increased scale, expertise, technology and resources give Flutter and Entain competitive advantages over smaller, standalone operators.
Helped by acquisitions, both companies have become increasingly diversified, including significant growth in online operations.
Meanwhile, international expansion has broadened their geographical diversification. For example, Flutter owns US #1 sportsbook FanDuel, while Entain owns European betting band bwin, with leading positions in markets including Germany, Belgium, France, Italy and Spain.
Flutter and Entain are also diversified beyond sports betting, as shown by brands like PokerStars and tombola (Flutter), plus CasinoClub and Foxy Bingo (Entain).
Wide diversification by geography and business line should help Flutter and Entain remain resilient in a UK recession.
In their half-year results, both companies reiterated their financial guidance for the full year. They said they’re vigilant to the uncertain macroeconomic backdrop, but Flutter reported “no discernible signs” of a deterioration in key spend indicators and Entain said that “momentum remains strong.”
Could investing in these two gambling stocks be a smart move for investors? Well, I see a lot to like about the businesses. They appear to have successful strategies and long growth runways. Both already have strong records of growth through regulatory change and headwinds, forged by their increasing scale, diversification and operational excellence.
Their 10-year records of 20%+ annualised shareholder returns are impressive, and the weakness of their shares over the last 12 months could represent a good opportunity.
One thing’s for sure, while I have a fancy for Earl of Tyrone in the Ebor Handicap on Saturday, I’d sooner back Flutter and Entain for long-term wealth building!
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G A Chester has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.