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This Stock Is Down After Earnings: Here Is Why it Is Still a Buy Today

Stars Group (TSX:TSGI)(NASDAQ:TSG) is a Toronto-based gambling company that operates online, mobile, and land-based casinos. Shares were down 3.42% in trading at the top of the noon hour on May 15. The stock has climbed 10% in 2019 so far.

Stars Group released its first-quarter 2019 results before markets opened on the same day. The company faced some headwinds in the quarter, including the cessation of operations in certain markets and foreign exchange shifts that were a drag on earnings. Still, total revenues climbed 47.7% year over year to $580 million and adjusted EBITDA increased 11.6% to $195 million.

In the spring of 2018, Stars Group celebrated the decision by the U.S. Supreme Court to strike down a 1992 federal ban on sports betting. Progress has been slow, but states are moving to legalize betting one by one. This is expected to accelerate into late 2019. In states that have moved to legalize, like New Jersey, online sports betting has thrived.

Stars Group made a big splash this month after it announced a joint venture with FOX Sports to launch FOX Bet. This will be the first national media and sports wagering partnership in the United States. Fox Corporation acquired 4.99% of Stars Group’s issued and outstanding common shares, and exclusive trademark, advertising, and editorial integration rights and licences. Prior to the 10th anniversary of the agreement, Fox retains the right to acquire up to a 50% equity stake in Stars Group’s U.S. business.

Betting saw a significant uptick internationally, as revenues rose 20.2% year over year to $20 million, or 31.3% on a constant-currency basis. Other segments, including Poker and Gaming, suffered a retreat from the prior year. In Australia, betting revenue soared 449% year over year to $61.1 million on the back of the BetEasy acquisition and the acquisition of William Hill Australia.

In late 2018, I explained why Stars Group looked like a solid buy before the New Year. Since the federal ban on sports betting was struck down, seven states have allowed widespread sports gambling. Montana, Indiana, Iowa, and Washington, D.C. have recently passed legalization bills. Experts estimate that by 2024, 70% of states will offer legal sports betting.

Stars Group’s partnership with Fox will position the company very well as this process plays out. Shares are currently trading at the low end of its 52-week range. Its forward P/E of 9.5 makes it a relatively cheap pick-up right now. The stock last had an RSI, which puts shares well outside technically oversold territory in the middle of May.

There is a lot to like about Stars Group going forward, but the stock has been disappointing since it plunged from all-time highs in the summer of 2018. Stars Group is well positioned for long-term growth after its partnership with Fox and continued legalization of sports betting that is trickling through the U.S. Stars Group is a must-add if it challenges 52-week lows in this post-earnings dip.

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Fool contributor Ambrose O'Callaghan has no position in any of the stocks mentioned.

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