What's Next for Sports Betting?

Constellation Brands (STZ -0.18%) wraps up its fiscal year, and Costco's (COST -0.11%) March numbers were strong, especially digital sales. In this episode of MarketFoolery, Motley Fool analyst Clay Bruning joins host Chris Hill to analyze those stories, as well as the state of the sports betting industry in America.

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This video was recorded on April 8, 2021.

Chris Hill: It's Thursday, April 8th, welcome to MarketFoolery. I'm Chris Hill. With me today, Mr. Clay Bruning. Good to see you, sir.

Clay Bruning: Hey, Chris. How are you doing?

Hill: I'm doing well. We've got sports betting on the menu. We've got retail news, but we're going to start today with the beverage industry, specifically the adult beverage industry. A fourth-quarter profits for Constellation Brands came in higher than expected. This is the beer, wine, and spirits company, probably the best-known brand in their portfolio is Corona. Although I imagine there are some listeners who prefer some of their wines or spirits or are mad at me for saying that. But I think that's fair to say that Corona is the best-known brand they have. The stock is down about 4% today, is this because of the guidance for the new fiscal year?

Bruning: Yeah. I think there are a couple of moving parts on this and you know I would say Corona is definitely their best-known brand. Then they've talked a lot over the last year about their Modelo brand and how it's gaining increasing market share. I think Modelo outgrew the rest of the business. So that's one worth mentioning outside of all the wine and liquor brands. But my interpretation was a little bit of a disappointing fourth quarter, but it's misinterpreted, in my opinion. They have divested a lot of their wine and spirits businesses over the last couple of quarters in the last couple of years to focus on that high-end kind of luxury brand, specifically in wine and spirits. So their guidance was a little bit muted in that regard specifically, I know the free cash flow and cash flow from operations are expected to be substantially lower in their upcoming fiscal year versus what they just produced in 2020. But you know what I think personally, it's a little bit misunderstood to have that 5% draw-down to that.

Hill: It is pretty interesting to see the moves over the last couple of years. You mentioned sort of divesting that they've done. Bill Newland has been CEO for us in just two years now. This is one of those CEO changes that brought change within the business. Basically him on doing some of the deals that they have made. I think it's, if you are a shareholder, kind of hard to argue with the stocks down 4%, 5% today. It's up 40% over the past year. So I think you have to, like the moves that he's made.

Bruning: Obviously, Seltzer has become a huge part of the alcohol industry and they pivoted pretty quickly to that. I think they're planning just under $1 billion in terms of capital expenditures in Mexico in 2021 to increase their capacity in that regard. Which will not only help increase the supply of those Seltzer from Corona, but they're talking about innovating and bringing in new types of Seltzers and new brands, just to Increase their kind of umbrella of coverage and hopefully gain some market share in that space.

Hill: It really does seem to be the story of not just for Constellation Brands, but alcoholic beverages in general in the industry over the past 12 to 18 months, it really does seem like the No. 1 story is the rise of Seltzer.

Bruning: Yes, absolutely. Something that I don't think it's overlooked, but it's something that isn't hard to plan a lot is that they do have a pretty substantial stake and Canopy growth as well. I don't think necessarily that we will see federal legalization of Cannabis in 2021. But I think over the next three to five years, that's something that is going to happen. They've realized over $1 billion gains since that acquisition in 2017. Not only is that going to be a way to have income from a subsidiary or an affiliate. But that's going to likely be a way that they're going to produce revenue over the long-term by having collaborations for CBD or THC drinks with Canopy growth over the long term. So something to keep your eye on if you're a Constellation shareholder interested in getting into that company.

Hill: March was another strong month for Costco. Overall revenue top $18 billion. Same-store sales was 16%, digital sales were up nearly 60%. It's hard to argue with what they're doing at Costco these days.

Bruning: Yeah. Pretty incredible. That's what really caught my eye as well. The e-commerce business when excluding gas and F-exchanges or foreign exchanges, like you said, nearly 60% increase in March, specifically year-over-year, and then 77% increase over the last 12 months versus 2020's March last 12 months. Pretty incredible there. It was worth noting that this report, the March quarter the five weeks that they looked at this year was a day shorter, which excluded Easter for them. They still have that, I think 16%, 17% increase in sales without Easter sales. They noted that that probably detracted from their sales by 1.5% to 2%. So pretty incredible report here from March sales for Costco.

Hill: We've talked a lot on this show about how the big retailers have adjusted over the past 12-15 months; Costco, Walmart, Target. But when you look at the stock performance, and I'm not taking anything away from what Costco has done because they've thrived in a way that is surprising, in a good way. When you consider how important the in-person experience is and how their digital sales were just not relevant in a way 15 months ago. But it seems like when you look at the stock performance of those three companies over the past year, Target is nearly doubled, and Costco is more akin to Walmart. Costco's share is up about 18% over the past year, Walmart in that same range. In terms of expectations for our investors, is it reasonable that expectations should be higher for Target than for Walmart and Costco? I'm not just basing that on the past year, but it does seem like when you look at the history of Walmart and Costco, even though one is much more tied to the membership model than the other, it really seems like, look, these are great businesses. Just don't get carried away with your expectations.

Bruning: Yeah. I'm glad you pointed out the membership model. I know probably a couple of years ago when I was in college, I was a Costco or BJ's, one of their competitor's member holders. I think that's part of the reason you should have somewhat needed expectations for Costco. You think about during the pandemic, everyone was lauding them for being an early adopter of mass, they have the wide aisles. They were essentially ready for the situation and not afraid of any backlash in terms of making statements on masks or something like that. I think you have to understand that membership could be a little flat or maybe even fall during the year because of so many people who adopted this membership because of just the pure quantity of goods that you get at discounted prices to be at a wholesale model. That's, I think one thing that benefits Walmart. It's a very similar model, so you don't have to pay whatever that annual membership fee is. Target is actually interesting to me. I've never been a big patron of Target until the last month or two. I went there a couple of times just to get some snacks and something, and I saw that they had this massive store with so many different things to buy, and I got lost for 30, 40 minutes to go along the store and I kicked myself. I gotta get out of here before I spend hundreds of dollars on a bunch of stuff I don't really need. Target is another interesting one that I've never paid too much attention to like I said, until the last couple of months. Definitely an intriguing story there over the last year, like you've said.

Hill: Don't feel bad. You're not the only one who goes into Target with the intention of buying one or two things and walks out with more things than that. Real quick because I'm not a Costco member. It seems like you mentioned your Costco membership in the past tense. This is just my ignorance. Costco, do they have a lower membership fee for college students and then once you graduated, it's like congratulations, we're jacking up your fee?

Bruning: Yes. I think we had a family plan and it was actually for BJ's. When I lived in the New York area, we were Costco and then I went to school in North Carolina and there was a BJ's within five miles. I don't think there is any college discount, but postgrad, I just didn't find the need to have to buy massive bags of chips or massive things of soda and stuff like that. I just went to the grocery store model personally, it is nothing really about pricing or anything. It was just convenience for me personally.

Hill: Two quick things for you to our last story. First, our guests on Motley Fool Money this weekend is documentary filmmaker Robin Hauser. She has a new documentary that's making its premiere at the Santa Barbara Film Festival. It's called Savvy, it is about money and I don't want to really give too much away, but great interview with Robin Hauser. She's our guest this week on Motley Fool Money, check that out. 

As always, if you're looking for more stock ideas for your watch list, check out our flagship service Stock Advisor. You get recommendations from Tom and David Gardner. You get their Best Buys Now and a lot more, just go to stockideas.fool.com, you get a 50% discount for being one of the dozens of listeners, 50%, that's real money, people, stockideas.fool.com. 

We got an email from Dan in Minnesota. He writes, "Because of the vaccine, prospects for pro sports in America seem brighter than they were in 2020. Do you expect this to be an even better year for the sports betting industry?" Thank you for that, Dan. Great question because I was surprised at how good last year was for the sports betting industry when you think about how cut down Major League Baseball, the NBA, and the NHL were, and the fact that the NFL pulled off the season that they did is a small miracle to me. But those other three, those were all compromised seasons.

Bruning: Yeah. This is a specific area that I've followed pretty closely the last couple of years, really something of interest to me and I think something that bolstered that 2020 figure in terms of performance and people betting on sports is the fact that mobile sports betting and mobile betting in general is increasingly gaining adoption. Specifically, one state that just went live on the online front was Michigan in late January. Just an incredible pent-up demand in Michigan. One market researcher noted that they expected gross casino revenues from online betting to be about $440 million in 2021, specifically in Michigan. After three weeks of Michigan being live for online betting, they increased that estimate by 81% to just under $800 million. Again, this is just Michigan alone. I think that gives you a little glimpse into the pent-up demand and the accessibility that online betting and specifically for sports provides. 

I think there are a lot of things moving in the right direction in terms of sports betting and specifically online. In the last couple of days, you could see New York introduce online gaming revenue as part of their budget for 2021 and beyond. It seems like it's going to take probably six, eight, maybe nine months and we probably won't see it really live until early 2022, but that would be just in time for the Super Bowl. On top of that, you have the NFL, which is the most important business in terms of casinos and sports betting. Increasing the season to 17 games was just a bonus for not only fans but for some of these casinos that are taking some of these wages. A lot of things moving in the right direction, I expect 2021 and beyond to continue some of that momentum we saw in 2020.

Hill: Thank you for reminding me of that last point because I had seen the approval of the NFL to add an additional regular-season game, it had not occurred to me the ripple effect of what that means for sports betting. Let's go back to expectations for a second. DraftKings (DKNG -6.08%), that stock's up more than 300% over the past year. What is reasonable to expect out of stock like DraftKings over the next one to two years. It can't keep that up over the next couple of years. So what is reasonable to expect?

Bruning: Yeah. I think 2020 was the inflection point. You had tons of momentum in terms of legalization. I'd almost argue that the current prices, a lot of the future regulatory momentum is probably baked in specifically New York and some other states and specifically sports betting, not online only, but physical and online, is currently legal in 40 or 50 states in the U.S. There are only 10 states that don't have some legislation either in the works or it's already operational. There's not a ton of room for growth. There are 14 states that are working toward legalization, according to the AGA, which is the gaming association that reports on a lot of this. I think 2020 as a year in terms of equity performance is an anomaly, I don't think anyone should be expecting the same returns we've seen over the last year, and it's no different for some of these casinos or online casinos like DraftKings, you have to have some needed expectations. But I think this is an industry as a whole that should outperform those major industries over the long run.

Hill: Great talking to you. Thanks for being here.

Bruning: Yeah. Thanks for having me, Chris. I appreciate it.

Hill: As always, people on the program may have interest in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. That's going to do it for this edition of MarketFoolery. This show is mixed by Dan Boyd. I'm Chris Hill. Thanks for listening. We'll see you on Monday.