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Why Stars Group (TSX:TSGI) Is up 20% Over the Past Month

Today, I want to cover a stock that I was high on in the last weeks of 2018. Stars Group (TSX:TSGI)(NASDAQ:TSG), a Toronto-based gaming and online gambling company, had seen its share price more than halved late last year after reaching an all-time high in the previous summer. In my view, this was a delicious buy-low opportunity in a company that was set to benefit from the proliferation of legal sports betting in the United States.

Shares have now climbed 15.8% in 2019 as of close on October 17. However, don’t be fooled; it surged into positive territory on the back of a major development early this month. This has vaulted the stock up 21% over a one-month period.

Early this month, Flutter Entertainment announced that it would acquire Stars Group in a $6 billion all-share deal to create the world’s largest online gaming group. Its aim is the take advantage of legal sports betting in the United States, which is still in its very early stages. Stars Group had already managed to achieve a foothold in several key states, including New Jersey and Pennsylvania. The company’s early successes drove me to recommend the stock in the middle of September.

Shore Capital analyst Greg Johnson projected that the American legal sports gambling market could be worth “north of $20 billion” once the legal details are fully hashed out in each state. Stars Group stock is still trading at the low end of its 52-week range. Value investors should take note of its consensus forward price-to-earnings ratio of 9.7, according to Morningstar, and its solid price-to-book value of 1.3.

Earnings are incoming

Stars Group is expected to release its third-quarter 2019 results on November 6. In the first six months of fiscal 2019, the company has reported revenues of $881 million compared to $640 million in 2018. Net earnings have increased to $32.2 million over a $80.4 million loss in the prior year. Diluted earnings per share have jumped to $0.12 compared to a loss of $0.52 in the first six months of 2018.

Expansion in key areas

Back in May, Stars Group announced a partnership with FOX Sports. The marquee product to come out of the partnership is FOX Bet, which will give customers in states with regulated betting the opportunity to place wagers on preferred sporting events. This month, FOX Bet strike a multi-year deal with Major League Baseball (MLB) that will make its mobile platform an Authorized Gaming Operator of the MLB in the United States.

In the linked September article above, I’d discussed why Stars Group was particularly appealing as the NFL season got underway. The NFL is the most wagered on pro sports league in the United States by a wide margin. The first month of the season powered New Jersey’s online and retail sportsbooks to a record handle in September. New Jersey saw it blow by $4 billion bets since the industry was officially legalized in the state in June 2018.

This new merger will position the Flutter-Stars Group entity extremely well as more states get set for sports betting legalization in 2020.

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Fool contributor Ambrose O'Callaghan has no position in any of the stocks mentioned. The Motley Fool owns shares of Paddy Power Betfair.

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