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Why Stars Group Inc. Is Down Over 8%

Stars Group Inc. (TSX:TSGI)(NASDAQ:TSG), one of the world’s leading online gambling companies, announced its fiscal 2017 fourth-quarter and full-year earnings results this morning, and its stock has responded by falling over 8% in early trading. Let’s break down the quarterly results and the company’s outlook on 2018 to determine if we should consider using this weakness as a long-term buying opportunity.

Breaking down the quarterly results

Here’s a quick breakdown of five of the most notable financial statistics from Stars Group’s three-month period ended December 31, 2017, compared with the same period in 2016:

Metric Q4 2017 Q4 2016 Change
Total revenue US$360.25 million US$310.29 million 16.1%
Adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) US$147.00 million US$147.60 million (0.4%)
Adjusted cash flow from operations US$132.28 million US$142.81 million (7.4%)
Adjusted net earnings US$111.95 million US$107.01 million 4.6%
Adjusted net earnings per diluted share (EPS) US$0.54 US$0.53 1.9%

And here’s a quick breakdown of five notable statistics from Stars Group’s 12-month period ended December 31, 2017, compared with the same period in 2016:

Metric Fiscal 2017 Fiscal 2016 Change
Total revenue US$1,312.32 million US$1,155.25 million 13.6%
Adjusted EBITDA US$600.31 million US$524.09 million 14.5%
Adjusted cash flow from operations US$525.52 million US$420.93 million 24.8%
Adjusted net earnings US$458.94 million US$366.70 million 25.2%
Adjusted EPS US$2.25 US$1.88 19.7%

Outlook on the year ahead

In the press release, Stars Group provided its outlook on fiscal 2018; here’s what it expects to accomplish:

  • Total revenue in the range of US$1,390-1,470 million, representing growth of 5.9-12% from 2017
  • Adjusted EBITDA in the range of US$625-650 million, representing growth of 4.1-8.3% from 2017
  • Adjusted net earnings in the range of US$487-512 million, representing growth of 6.1-11.6% from 2017
  • Adjusted EPS in the range of US$2.33-2.47, representing growth of 3.6-9.8% from 2017

Should you buy on the dip?

Stars Group posted a very strong performance in 2017, highlighted by double-digit percentage growth across all of its key financial metrics, but its fourth-quarter performance wasn’t all that great, and its outlook on fiscal 2018 calls for its growth to slow, so I think the weakness in its stock can be considered warranted; that being said, I think the weakness represents an attractive entry point for long-term investors, because it trades at very inexpensive valuations, including just 11.9 times fiscal 2017’s adjusted EPS of US$2.25 and only 11.1 times the median of its adjusted EPS outlook of US$2.33-2.47 for fiscal 2018, both of which are inexpensive given its current earnings-growth rate and its long-term growth potential.

With all of the information provided above in mind, I think Stars Group represents a great long-term investment opportunity today, and my Foolish colleague Demetris Afxentiou agrees, as he recently named it his top pick.

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Fool contributor Joseph Solitro has no position in any stocks mentioned.

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