I've been tracking this company for the last few months and for transparency sake I've made it my largest ever position (I'm technically in profit due to the dividend payments, but am a few cents down on my average cost per share).
I am so sure on this one, but please don't take my word for it. This is a very easy to research play, ask AI to do the calculations and you'll more than likely come to the same undervalued conclusions.
Why are Brightstar sitting near their 52 week lows? To secure their key region's lottery contract in Italy they were due to pay a massive €1bn+ license fee. That has all been paid for and they've got the license well into the 2030's. The key point analysts are basing the decline in share price on is the poor performance of Q1 (which was due to a poor rollover jackpot run, with their major jackpots being won early, not building to profitable high sales amounts). If Q2 was similar to Q1 then yes the 8% dividend would be hard to cover without dipping into credit lines, which is not a sustainable dividend practice.
Why I'm so certain:
The company just announced they've bought back $10m of stock. That's not the sign of a company who is struggling for cash to pay a dividend. This is the exact amount the company announced they were likely to pay as a fine for low sales in New Jersey and had reported that to the markets early in the quarter, potentially avoiding that fine due to a beneficial jackpot run? (AI thinks that narrative is unlikely, but it does fit nicely).
Looking to Europe, in particular Italy as their key region. The Euro Jackpot rolled over to its maximum level and then rolled over twice more at this cap (which is a rare event).
The super enalotto has continued to roll over for the whole of Q2 and is showing signs of increased demand as the jackpot builds towards €200m (again a rare event, making it one of the top jackpots in its history) It is expected to receive media attention at €200m if the rollovers continue to that amount to massively boost sales.
Moving on to another key demographic, the USA. The mega millions jackpot has changed it's pricing structure from $2 to $5 a ticket. This has meant a lower regular player base, but the jackpot amounts build as quickly, but with a lower risk of being won early. This is a massive fundamental odds change in the favour of the house (brightstar) who rely on these big jackpots to generate a frenzy of sales, which boost their profits margins.
It has also been a better quarter for Powerball, only being won once and it has rebuilt its jackpot quickly to over $300m dollars, which will put it in the region of a sizeable jackpot amount at the start of Q3 if it continues to roll.
If you look at the likelihoods of a long rollover, it is also overdue. It has been a long time since the Powerball and/or Mega Millions has reached frenzied purchasing territory (reaching $1bn+)
It's not just about lottery sales. Scratch cards are a large market share and a higher profit margin product than the lottery tickets. What factors will be influencing scratch card sales?
There is a term known as the halo effect in the lottery industry. When you buy a lottery ticket as a casual high jackpot player, you're more likely to buy a scratch card alongside it. When you win a small prize and collect it, you're more likely to 'reinvest' the winnings in another draw or scratch card. That's why these high rollover events are so important to companies like Brightstar. It's the casual player entering the game, bringing unexpected, high margin revenue to the balance sheets. Italy have also introduced a new €30 premium scratch card which has been popular as a novelty gift and high volatility gamblers.
The world cup effect! What has the world cup got to do with lottery sales? The key markets for Brightstar are the host nations. Airports are experiencing massive increases in footfall and flights and they are a great earner from tourists looking to splash their few dollars instead of taking it back home. Also people watching in pubs and clubs back home. Footfall is key and the more people entering shops and petrol stations the better it is for Brightstar.
All the above should show on the balance sheet as an increase in sales in the American and Italian key regions and a definite improvement on Q1, but most importantly is the set up and the convergence of 3 key lotteries rollover jackpots at the same time. We're only one week away from what is considered the perfect storm for a lottery retailer, entering a new financial quarter with 3 lotteries entering frenzy sales for their high jackpots. If all 3 roll over until the start of Q3 we could see an uplift for profit guidance, as this run wouldn't have been factored for in their timeline. The longer the jackpots run into Q3 the more profitable the company becomes and the more sustainable the dividend will be, as they pay down the debt from the high license payment.
I mentioned this a couple of weeks ago and it wasn't taken seriously, but here we are with a very real chance of a bumper end to Q2 and great start to Q3 with only a few rollovers remaining.
Please as always DYOR on this one. I'm enjoying waking up to check if any of the rollovers were won overnight and factoring updated models based on actual sales. For context the last mega millions run that hit the $500m+ mark was won on the first draw at that level. There was only a 7% chance that it would be won, based on actual tickets sales Vs the jackpot odds. This is why I'm betting on this company. Incredibly low odds is statistically a winner for the house and I'm happy to bet on the house.