When it comes to playing the Supreme Court decision which effectively legalized sports betting, the best bet looks like second-derivative plays. Walt Disney Co (NYSE:DIS), eBay Inc (NASDAQ:EBAY), CBS Corporation (NYSE:CBS) and MSG Networks Inc (NYSE:MSGN) stocks are all in this category.
What makes these stocks second-derivative plays on sports betting is the belief that people who bet on games will want to watch them. Therefore, as more people bet on games, TV audiences, TV ad revenue associated with sporting events, and sales of tickets to sporting events will greatly increase.
Most casino stocks have already climbed on the news. For example, Penn National Gaming, Inc (NASDAQ:PENN) has jumped around 30% since Apr. 25, (although the approval of the company’s acquisition of Pinnacle Entertainment Inc (NASDAQ:PNK) also likely played a role in the rally), while Monarch Casino & Resort, Inc. (NASDAQ:MCRI) has climbed about 10% since Apr. 12.
By contrast, Disney stock, eBay stock, CBS stock, and MSG Network stock have all pulled back significantly in recent months, leaving all four of the names trading at quite reasonable valuations.
Moreover, casinos are facing greatly increased competition as more and more gaming facilities are approved around the U.S.
The legalization of sports betting could cause casinos to be opened at an even faster rate going forward, creating fears of untenable competition among investors and causing casino stocks to drop sharply over the medium term and the long term.
For all these reasons, investors are much better off buying Disney, eBay, CBS, and MSG Network stocks to exploit the legalization of sports betting.
Sports Betting Stocks: Walt Disney Co (DIS)
I have been very bearish on Disney stock in the past, but sports betting legalization is just the medicine the struggling company needs.
In the six months ended Mar. 31, 2018, the operating income of Disney’s Media Networks segment sank 9% versus the same period a year earlier. The legalization of sports betting, however, should lead to a tremendous improvement in the financial metrics of ESPN and the ABC network.
As more people bet on sports, ESPN’s subscriber base will likely rise slightly, while its ad revenue will greatly increase. Meanwhile, ABC network’s sports programming, which features college football games, will generate much more ad revenue, making it much more profitable.
Since media networks account for over 50% of the company’s operating income, a significant rebound in the unit’s profitability should significantly boost Disney’s EPS and lead to a rebound in Disney stock. Additionally, Disney stock is down over 10% so far this year, while its forward price-to-earnings ratio is a reasonable 13.
Sports Betting Stocks: CBS Corporation Stock
The CBS network broadcasts two of the most popular, lucrative events in U.S. sports: NFL and NCAA basketball tournament games. Given the very high popularity of the NFL and the NCAA tournament, many people are likely to bet on them and then look to watch the games on which they bet. Consequently, CBS’ ad revenue from these games should jump by a large amount.
The increase is likely to have a significant impact on CBS’ bottom line. In 2017, the NCAA tournament generated an estimated $1.285 billion in ad revenue, which was split between CBS and Time Warner Inc (NYSE:TWX).
Assuming that CBS obtained 50% of the revenue, we arrive at a figure of $642.5 million in revenue for the company from the tournament. If sports betting legalization increases its revenue from the tournament by 30% in 2019, and the jump flows straight through to CBS’ bottom line, its profits would jump by about $200 million.
If the increase in the profits for all its NFL games comes in at double that amount, or $400 million, its total profits from the NFL and NCAA would jump by $600 million. Considering that the company’s operating income in the entire fourth quarter of 2017 was $343 million, we’re talking about a very significant increase in CBS’ profits that should cause CBS stock to rise meaningfully.
It’s also worth noting that CBS stock has dropped about 15% in the last six months, leaving its forward price-to-earnings ratio at a rather low 8.7.
Sports Betting Stocks: eBay Inc Stock (EBAY)
eBay’s StubHub, the online ticket reseller, generated $279 million of revenue in the fourth quarter of 2017. The unit, which sells tickets to many sporting events, credited baseball as one of the three key drivers of a 20% year-over-year increase in its top line.
If sports betting drives a 30% increase in StubHub’s revenue, which all flows through to the parent company’s bottom line, eBay’s operating income will jump by $93 million. Last quarter, eBay’s net income from continuing operations came in at $548 million, so a $93-million increase would be a significant jump and would likely lead to meaningful gains in eBay stock.
Since the beginning of March, eBay stock has dropped about 11%, leaving its forward price-to-earnings ratio at a reasonable level of around 14.
Sports Betting Stocks: MSG Networks Inc Stock (MSGN)
The least-known stock but the purest play on this list by far, MSG Networks (NYSE:MSGN) broadcasts New York Knicks NBA games, as well as the NHL games of the New York Islanders, New York Rangers and New Jersey Devils.
If its games become much more popular for viewers, it can charge more per subscriber, and its ad revenue should rise significantly. Moreover, MSG Networks stock is trading at a forward price-to-earnings ratio of just 7.3.
As of this writing, Larry Ramer did not own shares of any of the stocks named.