Shares in Paddy Power Betfair traded as high as +5% today after the bookmaker reported solid Q3 results. Revenues grew 8% year-on-year (YoY) while pre-tax profit was flat. After costs associated with recent acquisitions and tax changes are removed, however, profits were up 6%.

The sweetest tune for Paddy Power shareholders, however, was news that the company was raising its full-year profits guidance to £465-480m. No change to the upper bound, but a £5m improvement to the lower.

Results also pointed to a change in direction for PaddyPower’s business focus. While UK retail gambling continued to suffer (-4% YoY), the biggest value-adding segment has been online (+22%), with revenue generation accelerating during the post-World Cup period to +13%, compared to +7% in Q2, before the world cup. International markets also continued to please shareholders, especially the US, where Paddy Power’s revenue grew 22% and is looking to expand further.

What happens when you put one winning segment (online) with another (US)? Well, for Paddy Power, you get FanDuel, a sports betting and fantasy sports website which the British bookmaker acquired in July. On its own, FanDuel had a 40% share of the US fantasy sports market and 30% of the sports betting market, while the combined Paddy Power-FanDuel would make it the largest such online operator in America by revenue.

The domestic UK gambling market has been ensnared in regulatory doldrums for some time now. Stake limits on gaming machines are being lowered from £100 to £2 in 2019, an estimated 2-2.6% hit to revenues, while remote gambling duty (tax) will go up from 15% to 21% (another £15m hit to profits). All of this may be great news for UK consumers (gambling addiction is a serious issue), but it also means bookmakers like Paddy Power need to look outside of the UK box to find new sources of growth.

International diversification looks to be the answer. The markets loved it when peer competitor William Hill said it was acquiring Swedish online gambling company Mr Green & Co. (another combination of online & overseas). The shares have bounced 14% from it’s 2018 lows a week ago, while Paddy Power itself is +15% from 2018 lows.

But it’s the US market that could be the real El Dorado for UK Index bookmakers, following a US Supreme Court ruling earlier this year that allowed individual states to legalise sports betting. Paddy Power has made a real power play move to stake a claim in the new lucrative segment, with FanDuel opening its Sportsbook app in New Jersey in September.

While PPB shares are -20% this year, the company appears to be staking the odds in its favour. As they say, the house always wins.

What do you think? Are UK Index gambling operators set to rebound after a miserable year of regulatory changes and FX headwinds? Do you see a tradable opportunity with Paddy Power and its peers? Whether you like bargain blue chips, companies reporting results or interesting ranges, here at Accendo Markets, our research team publishes trading ideas like these several times a day. Get access to our daily tradable opportunities by clicking here.

Josh Phipps, Senior Trader, 2 November 2018