In a landmark decision, the US Supreme Court ruled that states could legalize sports betting. We expect this to be a positive catalyst for several gambling-related equities, and many are moving fast to capitalize on the development. We’re taking a long-term view on potential ramifications and are not jumping head-first into any potential opportunities…yet.
By Brian Nelson, CFA
On May 14, 2018, in a 6-to-3 ruling, the Supreme Court of the United States ruled in Murphy v. National Collegiate Athletic Association that states could legalize sports gambling. The decision overturns the Professional and Amateur Sports Protection Act, a previous 1992 decision. The implications on a state by state basis have yet to play out, but we’d expect many states, including New Jersey, West Virginia, Delaware and Mississippi, to put into place measures to give the thumbs up on sports betting, as it surely will be a stimulant to economic growth and, of course, tax revenue for states. According to the New York Times, the black market for illegal sports wages is estimated at $150 billion, offering a huge market for existing private and publicly-traded gambling enterprises.
We’ll withhold our views on what such a development means for society, but for those entities tied to the sports industry, including venues like Madison Square Garden (MSG), the development is a net positive. The ruling may impact the Vegas market negatively, as gamblers will no longer have to travel to the desert to place a wager on their favorite sports event, but we think most share will be taken from the black market. Furthermore, many are saying that fans will become more intrigued by sporting events, as once they’re able to bet freely, they’ll have “skin in the game” and be more attentive to the action. The ruling could even spur increased viewership at sports-heavy television networks such as Disney’s (DIS) ESPN, for example. There may probably be a very large overlap between sports fans and those that gamble on the game already, but the impact of the ruling seems quite positive. The market for mobile sports betting may very well explode in coming years.
We think the biggest beneficiary of the development is Churchill Downs (CHDN). The company has been working hard to revitalize the thoroughbred horse racing industry, which hasn’t been that healthy given the proliferation of off-track betting facilities and declining racing stock, but the inclusion of sports betting at its horse racing facilities across the country could be a significant boost, leveraging existing infrastructure and helping levels of profitability. Churchill Downs is moving fast. Just two days after the ruling, the company that shares its name with the legendary race track in Louisville, Kentucky, announced plans to offer sports betting in its casinos and online in New Jersey, Pennsylvania and Mississippi. Churchill Downs has a significant leg up on the competition, already owning the largest platform for online betting in horse racing in TwinSpires.com.
Several casino operators and suppliers rallied hard on the news, too, including Caesars Entertainment (CZR), William Hill (WIMHF), MGM Resorts (MGM), and Boyd Gaming (BYD), but we’re not going to get ahead of ourselves. It seems like today, those of legal age can gamble on just about anything anywhere, and it remains to be seen whether most of the share of black-market sports betting activity will be picked up by the penny-slot operator at the local bar, or if it will encourage gambling fans to travel to the local casinos. Given the frequency of sporting events from baseball to basketball to football across amateur and professional ranks and beyond, it’s likely that a local, more accessible venue may be the place for sports-betting “action” and not at the big casinos. In any case, it’s hard not to view the ruling as a positive for casino operators and their suppliers, and a significant positive for Churchill Downs, in particular.
We’re holding the line with our fair value estimates for now.
Related: SGMS, ERI, FLL, GMVHF, DDE, BWLD
Gaming: BYD, CHDN, LVS, MGM, PENN, PNK, WYNN
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Brian Nelson does not own shares in any of the securities mentioned above. Some of the companies written about in this article may be included in Valuentum’s simulated newsletter portfolios. Contact Valuentum for more information about its editorial policies.