Churchill Downs, Inc. Stock Just Cannot Seem to Lose

CHDN stock is a profitable investment that isn't just about horse racing

How many people can guess that there is a company behind The Kentucky Derby, that it is publicly traded and offers a lot more than just the annual horse race? Sure enough, Churchill Downs Incorporated (NASDAQ:CHDN) fits the bill and just reported crackerjack earnings. CHDN stock got a nice bump as a result.

First, you probably need a rundown on exactly what CHDN stock consists of. The Racing segment includes four racetracks: Churchill Downs, Arlington International Race Course, Fair Grounds Race Course and Calder Race Course. Revenue is generated from commissions on parimutuel wagering at racetracks and off-track betting facilities, along with admissions, sponsorships and licensing rights and food and beverage sales.

CHDN stock also has a Casino segment, which has 9,900 gaming positions at five casinos and two hotels, plus two JV’s with other companies.

The TwinSpires Segment is the one I love the most, because it is the online and mobile horse wagering business. It is high margin and growing rapidly. In addition, if California permits legal online card rooms, it already has all the infrastructure set up. There is also Big Fish Games, which is a producer and distributor of both free and paid games.

CHDN Stock Revenue Report

Revenue for the quarter increased $11.4 million to $314.8 million, driven almost entirely by the $10.8 million increase from the TwinSpires segment. The $4.5 million increase from Casinos and a $0.5 million increase from Racing and Other Investments were offset by a $4.4 million decrease at Big Fish Games.

Net income rose dramatically, from $8.7 million to $16.7 million. Almost all of it came from the operating businesses, but also a $4 million increase in equity investments.

Revenue from racing increased slightly from $41.3 million to $41.9 million. The racing segment isn’t a big cash flow provider, only providing $1.7 million. Casino revenue grew from $83 million to $87.5 million. Casinos have exceptional EBITDA, and we see it from the $40 million this quarter, as compared to $30.4 million last year. TwinSpires also does very well in cash flow, with EBITDA increasing from $14.7 million to $18.8 million, on a revenue increase from $55.5 million to $66.1 million.

Although Big Fish Games saw a revenue decline of $4.3 million, that hit the EBITDA line harder, down to $17 million from $27.2 million. Still, that’s a nice piece of cash flow.

So far this year, revenue is up just 1.5% to $1.046 billion. Operating income rose significantly – 20% — to $180 million. The decline in Big Fish revenue led to a decline in operating expense. Thus operating margins expanded from about 14.9% to 18.1%. So far this year, net income is up 25% to $102.3 million.

The Bottom Line on CHDN Stock

CHDN stock carries $58 million in cash. However, it carries $511 million in long term debt, and $596 million in notes payable. That billion dollars in debt is costing CHDN stock about $48 million annually.

With a business like this, you expect that cash flow will be pretty good, and it is pretty decent. However, it also fell YOY, from $189 million to $164 million. Still, that’s a very impressive number.

So do we hop on this race horse and see where it takes us? With TTM net income of $130 million, and a market cap of $3.2 billion, CHDN stock trades at 24x earnings. Yes, net income looks like it will be up to about $130 million for this fiscal year, meaning net income growth of 22%.   So 24x is not a totally unreasonable price to pay.

I would like to see some expansion in the high margin businesses, but I would say that if you are looking for a small-cap stock that carries a fair amount of risk but may be in line for commensurate return, you can do worse than Churchill Downs.

Lawrence Meyers is the CEO of PDL Capital, a specialty lender focusing on consumer finance and is the Manager of The Liberty Portfolio at www.thelibertyportfolio.com. He does not own any stock mentioned. He has 22 years’ experience in the stock market, and has written more than 1,600 articles on investing. Lawrence Meyers can be reached at TheLibertyPortfolio@gmail.com.


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