Did you catch the always thrilling Kentucky Derby on Saturday? Did you pick the long-shot winner, like my 8-year-old daughter did (for the second time)? Do you want to make money on horse racing but think “handicapping” means breaking your own kneecaps and joining a three-legged race?
Fear no more, here’s how you can profit from the ponies, along with wrestling, race cars and concerts.
Churchill Downs (NASDAQ:CHDN) is a public company that operates five racetracks, a casino-resort in Florida, 3,500 slot machines across several locations and numerous wagering platforms including off-track betting. The company handled over $2 billion in racetrack wagering last year.
Interestingly, while the horse-racing industry continues to see overall declines in revenue and wagers, Churchill Downs is enjoying an increase. Indeed, the Kentucky Derby set yet another attendance and betting record this year.
But Churchill Downs’ Twin Spires online wagering platform is the key to the company’s faster growth. Legal in the U.S., Twin Spires has gone from a mere start-up in 2007 to one of the premier Internet wagering platforms. If you know anything about online betting, then you know it’s hugely popular and that many people are quite angry about the Department of Justice’s poker domain seizures. Twin Spires saw a 15.2% handle increase year-over-year in the first quarter.
Churchill Downs carries only about $100 million in low-cost debt, and it generated $135 million in free cash flow in the trailing 12 months. Much of Churchill Downs’ future growth will depend on its online wagering as horse and other gaming revenues aren’t seeing tons of growth. The stock is trading at 20x earnings, and the three analysts who follow it say to look for only 8% annualized growth. If they’re right, it’s an expensive stock.
Keep an eye on CHDN falling in a broad market drop or for further online initiatives that will fuel growth.
World Wrestling Entertainment (NYSE:WWE) is the brainchild of Vince McMahon. For over 30 years, pro wrestling has captivated a niche audience of American entertainment-seekers. WWE is a great brand, but it has always struggled as a public company because it can’t seem to boost top-line growth beyond low single digits each year.
The key to overcoming that will be international expansion and WWE’s film studio, which thus far has been spotty. It doesn’t yet appear that the brand has translated to feature films and given WWE the blockbuster it really needs.
The company does pay a 5.4% dividend, but that had been cut in half, and WWE isn’t generating enough free cash flow to sustain even this level. WWE might make an interesting speculative purchase, and if it can maintain that dividend, a cheap one as well.
International Speedway (NASDAQ:ISCA) owns and/or operates 13 race-car tracks, and annually promotes about 100 stock-car, open-wheel, sports-car, truck, motorcycle, go-kart and other racing events. The company carries $346 million in debt and $100 million in cash, and it frequently engages in capital restructuring and share repurchases to make its capital use as efficient as possible.
Of course, racing is very big here in the U.S., and when Main Street really recovers, ISCA should see significant improvement in its results. That’s not to say it’s in bad shape, but earnings will be flat this year, with high single-digit growth going forward. Free cash flow last year was $125 million, and ISCA increased its dividend a wee bit.
At 15x earnings, the stock is priced for future growth, but again, it might make an interesting selection if the stock falls from here.
If you like live music, then you know about Live Nation‘s (NYSE:LYV) management, promotional and ticket-selling business. You’d think all those fees that it tacks on to its tickets would mean huge profits, but they don’t. In fact, Live Nation loses money every year. Cash flow is decent, and the balance sheet is fine, but there just isn’t much growth here.
So how exactly do you profit? I think the path of least resistance for all of these stocks is down, which means you may want to consider shorting them if you want to speculate. However, none of them are in danger of going under, which is why I short stocks. Otherwise, if you hold any, you may want to sell.
If you’re looking for a buy, I’d probably go with International Speedway and bet on an economic recovery at some point.
As of this writing, Lawrence Meyers did not hold a position in any of the aforementioned securities. He is president of PDL Capital, Inc., which brokers secure high-yield investments to the general public and private equity. You can read his stock market commentary at SeekingAlpha.com. He also has written two books and blogs about public policy, journalistic integrity, popular culture and world affairs.