Unanswered questions remain at Entain after Q1 update

In a brief and reasonably uneventful trading update, Entain (LSE:ENT) reported performance which was in line with its own expectations, set against pockets of weakness which have tended to overhang the performance of the shares.

Some of the ongoing challenges which the company faces were in evidence from the numbers. Regulatory crackdowns continue to hinder progress in many of its developed markets, such as in the UK where Net Gaming Revenue (NGR) fell by 7%, following the effects of regulatory implementation.

In addition, adverse sports results represent the nature of the beast, and marginal growth of 2% in NGR for the group’s joint venture and jewel in the crown, BetMGM, was impacted by a series of customer-friendly win margins both online and across its retail sportsbooks.

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More positively, BetMGM retained its 14% market share and customer acquisition was boosted by recent events such as the Super Bowl. BetMGM recently turned earnings positive in a major sign of progress for the group in a thriving US market in which enormous potential remains. Overall NGR for the group rose by 6%, with the International offering outside of the US also providing signs of real traction, despite weakness in markets such as Australia, the Netherlands and Germany.

Overall, the share price has suffered as a result of a number of unanswered questions, not least of which is regulatory threat, emerging competition in the US and the ongoing search for a permanent CEO, which injects some uncertainty into the group’s immediate strategic direction.

The shares have fallen by 38% over the last year, as compared to a dip of 0.8% for the wider FTSE100, and have now declined by 48% over the last two years. Despite the headwinds, BetMGM remains the most exciting driver for potential growth at Entain, alongside which the company is looking to improve its operations and exit less profitable markets.

As such, and although Flutter Entertainment (LSE:FLTR) remains the preferred play in the sector, the market consensus of the shares as a 'buy' reflects real optimism in prospects for established longer-term growth.

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Market snapshot

Markets arrested some of their recent declines following promising company updates, but sentiment remains fragile in view of an unstable situation in the Middle East and update comments from Federal Reserve Chair Jerome Powell which continue to dampen hopes of an imminent rate cut.

Powell’s comments reiterated what the market already knows from some recently hotter-than-expected inflation readings, namely that the genie is not yet back in the bottle. In addition, the economy seems to be fully able to progress under its own steam despite the hindrance of higher rates, suggesting that cuts are simply not necessary for the time being.

For the market rally to continue, the baton has been passed to the corporates who will need to demonstrate higher earnings, and the initial opening of the latest reporting season has been largely positive.

Mildly disappointing updates from Johnson & Johnson (NYSE:JNJ) and Bank of America Corp (NYSE:BAC) were more than offset by outperforming numbers from the likes of UnitedHealth Group Inc (NYSE:UNH) and Morgan Stanley (NYSE:MS). After a mixed and choppy session, the main indices were close to flat, leaving the benchmark S&P500 ahead by 5.9% in the year to date, the Nasdaq by 5.7% and the Dow Jones by a rather more uninspiring 0.3%.

In the absence of any positive catalysts either from Wall Street or indeed Asia overnight, UK markets opened in lacklustre form despite earlier hopes of a rebound following a poor performance in the previous trading session.

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Sentiment was also hampered by an inflation reading which revealed a slowdown to 3.2%, or 4.2% at the core level excluding food, energy and tobacco, both of which were behind expectations for a larger fall. As such, hopes seem to have been dashed once more as to the likelihood of an imminent rate cut, especially since it is largely agreed that the UK has already left a brief and shallow recession, even though economic growth rates remain pedestrian.

Mining stocks were a positive exception to the generally apathetic mood, following broker reviews and some positive trading updates, lifting the likes of Fresnillo (LSE:FRES), Anglo American (LSE:AAL) and Rio Tinto Registered Shares (LSE:RIO). Burberry Group (LSE:BRBY) shares moved ahead on a read across from positive numbers from Lvmh Moet Hennessy Louis Vuitton SE (EURONEXT:MC), although there were enough negative share price shifts to offset any immediate optimism.

This relative stalemate leaves the FTSE100 ahead by just 1% in the year so far, erasing most of its more recent gains, while the FTSE250 continues to move further away from its brief return to positive territory, now standing down by 1.9%.