This Saturday is the 142nd running of the Kentucky Derby, the Bluegrass State’s ode to horse racing.
All eyes will be on Louisville as the best 3-year-old thoroughbreds run for the roses.
While the state is well-known for its love of horses, there also are some great public companies operating there.
As you pony up to make your bet on the Kentucky Derby Saturday, consider making a side wager on these three Bluegrass State stocks.
They won’t let you down.
Bluegrass State Stocks to Buy: Yum! Brands, Inc. (YUM)
While its stock is having a good year, up 10.7% year-to-date, Yum! Brands, Inc. (YUM) has trailed the S&P 500 in three out of the past five years and currently faces some issues in China — the most pressing being the spinoff of that segment of its business sometime in 2016.
While investors continue to debate whether hiving off its Chinese business (approximately 50% of its overall revenue) is a good move or not, the spotlight will be squarely on YUM come Kentucky Derby day, as it is the presenting sponsor of the $2 million race, a two-minute event that attracted almost $140 million in betting in 2015 and 16 million television viewers.
The day’s exposure to the YUM brand and, by extension, YUM stock, is priceless. It gets to play the part of good Samaritan on the local, regional and global stage while having the exclusive opportunity to tell its corporate story to a crowd that understands money. The sponsorship dollars are anything but a waste because few events compare in terms of their spectacle.
At the end of the day, Yum Brands is Kentucky’s second-largest public company by revenue and a stock worth holding for the long-term.
Bluegrass State Stocks to Buy: Brown-Forman Corporation (BF.A, BF.B)
Bringing Woodford Reserve, the official bourbon of the Kentucky Derby, to Saturday’s big party, Brown-Forman Corporation (BF.A, BF.B) provides race fans with the key ingredient for the 120,000 mint juleps served at Churchill Downs over the two-day celebration of horse racing. Interestingly, the mint julep is made with Old Forester, another of Brown-Forman’s many liquor brands.
Brown-Forman and the mint julep are synonymous with the Kentucky Derby.
Recently, however, the family-controlled company jumped into the Scotch business, paying $416 million to purchase BenRiach Distillery Company Ltd., makers of three single-malt Scotch brands: BenRiach, GlenDronach, and Glenglassaugh. Once upon a time, Brown-Forman held a minority stake in Glenmorangie plc but sold its interest in 2005 when Moet Hennessy acquired the brand.
In 2015, Brown-Forman acquired Irish whiskey maker Slane Castle and is opening a new $50 distillery just outside Dublin. With these two acquisitions, it now owns whiskey brands in four major categories: American, Scotch, Irish and Canadian. With Brown in its corporate name, it’s only appropriate that it plays a big part in the brown liquor business. Now if it could only buy a rum brand, it would be all set.
Like Churchill Downs, Brown-Forman has changed with the times. No longer does it primarily sell in the U.S. In 1995, it generated 87% of its business here in America. Today, that’s down to 43%. Globalization is a big part of its future plans.
The highlight of its Q3 report: Woodford Reserve delivered 29% year-over-year growth for the first nine months of 2016. Also doing well was its Jack Daniel’s Tennessee Fire which saw a nine-month increase in sales of almost 38%.
There’s a lot to like about Brown-Forman but probably its biggest strength is management. CEO Paul Varga has been in the top job since 2007 and with the company for 28 years. Adding to this stability is the many generations of the Brown family that share in its ownership — 67% of the Class A voting shares — a governance commitment you rarely find in public companies.
I like the next stock slightly more, but only by a nose.
Bluegrass State Stocks to Buy: Churchill Downs, Inc. (CHDN)
Who says horse racing is in the gutter?
You certainly wouldn’t know it judging by the long-term performance of Churchill Downs, Inc. (CHDN) stock. It may be down 10% YTD, but this is only its third losing year out of the last 11, and it has still got more than half a year to make it back into positive territory.
So, how does the closest thing to a pure-play horse racing business manage to deliver a 26.6% annualized total return over five years? Well, not by sticking exclusively to what got it here in the first place. Tradition is fine and it’s more than on display come Derby day, but like any business around for more than 130 years — you evolve or die.
CHDN owns five racetracks including Churchill Downs, seven casinos, two hotels, the largest legal online wagering platform for horse racing in the US, and Big Fish Games, the fifth-top-grossing mobile publisher in the U.S. and 19th biggest worldwide.
Churchill Downs acquired Big Fish Games in December 2014 for $835 million. Today, it accounts for 32% of the company’s adjusted EBITDA; horse racing, whether live or online, accounts for another 37% and casinos the remaining 32% of its adjusted EBITDA.
It has evolved with the times and investors have been richly rewarded.
Seven years ago, CHDN generated 87% of its revenue and 73% of its adjusted EBITDA from racing. Today, both of those numbers have been halved, clearly demonstrating the diversification of revenue and income streams management’s been able to deliver for shareholders.
Growth has come both organically and through strategic acquisitions such as Big Fish Games. No longer is the Kentucky Derby the make it or break it event for the company that it once was.
If you’re buying stocks in the Bluegrass State, CHDN is your best bet.
As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.