No one knows how things will change as the world emerges from dealing with the COVID-19 pandemic. But we are at least starting to get a glimpse of how organized sports are planning to navigate the short-term obstacles. And people have already changed some behaviors for recreational activities and exercise as they were forced to shelter in place.
The three businesses below had good prospects prior to the pandemic, and should benefit as things return closer to normal, and from new trends that emerge.
Image source: Getty Images.
A huge new market
Flutter Entertainment (PDYP.Y +0.00%) is a U.K.-based global sports betting operator. Its most familiar brand for U.S. investors may be FanDuel, the online fantasy sports and betting app. Flutter evolved in its current form from what was formerly called Paddy Power Betfair (PPB). Paddy Power was the first betting company to launch a mobile app, in 2010. The company bought FanDuel in 2018 and merged with the Stars Group in May, 2020.
Flutter now operates as four divisions: Australia, with online brand Sportsbet; PPB Online, which includes the Paddy Power brand and operates in over 100 countries; PPB Retail, with 623 Paddy Power betting shops in the U.K. and Ireland; and the U.S., which operates FanDuel sports books in six states, daily fantasy sports in 40 states, horse racing wagering, and online casinos in New Jersey and Pennsylvania.
Image source: Flutter Entertainment.
While sales almost doubled for the U.S. division in 2019, it still only made up 18% of total revenue. U.S. states are now allowed to legalize sports betting, and more are likely to do so. FanDuel and rival DraftKings (DKNG 3.94%) are the leaders in what is estimated to be a $150 billion domestic market. The pandemic has led to pent-up demand for professional sports. Regardless of what form it takes upon its return, the online betting market is likely to grow, and Flutter Entertainment with it.
The return of professional sports
It's still uncertain when, and how, sports leagues will return. Golf, racing, and UFC matches are back in the U.S., and a major test will come as the NBA works with Walt Disney (DIS +2.26%) to finish its season in the "bubble" of Disney's ESPN Wide World of Sports campus near Orlando, beginning July 30. A successful outcome could lead to more attempts at this format.
Disney should get a boost from the return of sports no matter what form it takes. As of its second quarter, ending March 28, Disney's media networks segment accounted for 40% of total revenue. Its direct-to-consumer segment, which includes streaming service ESPN+, was another 23%.
As sports return mostly without live fans, there will be strong demand to watch broadcasts. The media segment includes ESPN, the ABC network, and eight television stations, including in the top four domestic markets. Disney is also facing headwinds in its other segments as its theme parks try to reopen, movie releases continue to be delayed, and cruise ships remain docked. But those headwinds should recede in the long term, and in the meantime, the company can benefit from its sports-related assets.
Image source: Getty Images.
Outdoor recreation reset
Stay-at-home orders to help prevent the spread of the COVID-19 virus led many to look for new ways to exercise. The popularity of individual activities like running, biking, hiking, or walking seems to have increased as gyms remained closed and people needed to get fresh air.
The market for devices that help with training or measuring these activities had already been accelerating for device maker Garmin (GRMN +1.16%). The company that used to rely on sales of personal navigation devices used in automobiles has pivoted sharply over the last decade. As recently as 2013, its auto segment represented almost half of total revenue. For 2019, it was below 15%. Its four other segments have been growing strongly, and profitably, in that time.
| Segment | Q1 2020 Sales Growth (Decline) YOY | Q1 2020 Gross Profit Margin |
|---|---|---|
| Fitness | 24% | 50% |
| Marine | 22% | 58% |
| Outdoor | 14% | 64% |
| Aviation | 10% | 74% |
| Auto | (17%) | 47% |
Data source: Garmin. YOY = year over year. Table by author.
Garmin's four growing segments offer smart devices ranging from simple fitness trackers to premium equipment used by dedicated triathletes. Its outdoor segment supplies golfers and hunters with GPS equipment, and the marine division benefits from the popularity of recreational boating.
The company also made a timely purchase of privately held indoor cycling company Tacx in 2019. In its first-quarter 2020 earnings call, CEO Cliff Pemble said, "We've not been able to supply all of the demand that we're seeing there." A 2020 capital project is for a new factory to meet that demand. Garmin also has $2.6 billion in cash and marketable securities on its balance sheet with no debt. Investors can feel good about collecting a secure dividend even as the business grows.
In a good position
Flutter, Disney, and Garmin each rely on different markets. But each will benefit from the return of sports and the growth of outdoor recreation as the world gets to the other side of the pandemic.
Each company had a compelling growth story prior to the disruption caused by COVID-19. While the impacts of the pandemic have hurt each of these businesses, the long-term scenario should have them all poised for growth.
