No, the racetrack isn’t going up in actual smoke. But Churchill Downs (CHDN) — which is more than just a racetrack — has seen great returns over the past few years. The stock had no net return from its IPO in 1993 through 2009. But since then, CHDN stock has almost tripled.
Churchill Downs is slowly becoming a diversified gaming company. You know about the racetrack in Kentucky. On top of that, it has racetracks in Florida, Louisiana, Illinois, and Ohio. The Illinois operation also has 11 off-track betting facilities. Churchill Downs operates pari-mutuel betting services for other racetracks, along with casino operations in Florida, Louisiana, Mississippi, Maine, and Ohio.
CHDN stock is also rising because of its online operations, which includes TwinSpires.com (online wagering), and real-money online Bingo, a multimedia poker company, and all the associated technology supporting these operations.
Churchill Downs just reported earnings, and the numbers look pretty good. Revenues climbed 7% year-over-year to $304 million and adjusted EBITDA was up 12% to $116 million. Operating EPS increased 14% to $3.21 per share. The online segment saw a 9% revenue increase to $57 million, which included a 20% increase in unique players. Adjusted EBITDA for the segment was flat, as the company continues to spend to grow the segment. Racing saw an 11% Adjusted EBITDA increase to $78 million.
Basically, everything good was up considerably. Meanwhile, the company continues to use funds to buy back stock, repurchasing almost 700,000 shares for $61 million in the quarter. The balance sheet remains solid: $46 million in cash is offset by $368 million in debt, which costs about 6.5% to service annually.
Gaming remains a quasi-cyclical business in the United States. Larger players like Wynn Resorts (WYNN) and Las Vegas Sands (LVS) have moved aggressively into Macau. Churchill Downs can’t draw down billions in debt. It has chosen to focus on the niche segment of racing/small casinos and hotel/online.
Horse racing will always have its fans, and the Derby this year broke all kinds of records. I’m particularly interested in the online arena, where I think the opportunity is gigantic. I think that, at some point, the feds will permit legal online gaming in order for both it and the states to collect the tax revenue.
At that point, the gold rush will be on. While other companies will battle over the poker space, I think Churchill Downs’ brand name will help it capture sportsbook action and certainly horse-racing action.
Earnings continue to grow for CHDN stock, slated to grow about 20% this year to $3.69 per share and another 15% next year to $4.22. However, analysts think long-term growth of 12% is more likely. I think that number is low, because it doesn’t account for online increases.
Using a figure of 15x this year’s earnings of $3.69, fair value for CHDN is roughly around $56. Alas, the stock trades at $86, so I think it’s way ahead of itself. However, keep an eye on it if we see a big market correction. Even grabbing it at $60 or so might bring you good returns.
As of this writing, Lawrence Meyers did not hold a position in any of the aforementioned securities. He is president of PDL Broker, Inc., which brokers financing, strategic investments and distressed asset purchases between private equity firms and businesses. He also has written two books and blogs about public policy, journalistic integrity, popular culture, and world affairs. Contact him at email@example.com and follow his tweets at @ichabodscranium.