BUSINESS
Churchill Downs Incorporated operates as a racing, online wagering, and gaming entertainment company in the United States. It operates through three segments: Live and Historical Racing, TwinSpires, and Gaming. As of December 31, 2021, the company owned and operated three pari-mutuel gaming entertainment venues with approximately 3,050 historical racing machines (HRMs) in Kentucky; TwinSpires, an online wagering platform for horse racing, sports, and iGaming; nine retail sportsbooks; and casino gaming in eight states with approximately 11,000 slot machines and video lottery terminals, and 200 table games. It also offers streaming video of live horse races, replays, and an assortment of racing and handicapping information; and provides the Bloodstock Research Information Services platform for horse racing statistical data.
INVESTMENT RATING
CHDN is expected to continue to be a major Value Builder reflecting capital returns that are forecasted to be above the cost of capital.
Churchill Downs has a current Value Trend Rating of C (Neutral).
The Value Trend Rating reflects very contradictory signals from PTR’s two proprietary measures of a stock’s attractiveness. Churchill Downs has a good Appreciation Score of 80 but a poor Power Rating of 27, resulting in the Neutral Value Trend Rating.
Churchill Downs’ stock is selling well below targeted value. The current stock price of $117.43 compares to targeted value 12 months forward of $320.
Churchill Downs’ high appreciation potential results in an appreciation score of 80 (only 20% of the universe has greater appreciation potential.)
Churchill Downs has a Power Rating of 27. (CHDN’s poor Power Rating indicates that it only has a higher likelihood of achieving favorable investment performance over the near to intermediate term than 27% of companies in the universe.)
Factors contributing to this poor Power Rating include: CHDN’s earnings estimates have fallen very significantly in recent months; the Miscellaneous Amusement & Recreational Services comparison group is currently in an unfavorable position; and recent price action has been neutral.
INVESTMENT PROFILE
CHDN’s financial strength is above average. Financial strength rating is 67.
Relative to the S&P 500 Composite, Churchill Downs Inc has slightly more Growth than Value characteristics; its appeal is likely to be to investors heavily oriented toward Capital Gains; the perception is that CHDN is higher risk. Relative weaknesses include: high financial leverage, low historical growth, and high earnings variability. CHDN’s valuation is high: low dividend yield, moderate P/E ratio, and high price/book ratio. CHDN has unusually low market capitalization.
CURRENT SIGNALS
Churchill Downs’ current operations are eroding. Return on equity is falling, reflecting: falling asset utilization; and falling tax keep rate.
Churchill Downs’ current technical position is mixed. The stock price is in a 2.1 month up move. The stock has appreciated 24.4% from its prior low. The 200 day moving average is in a downtrend. The stock price is above its 200 day moving average.
ALERTS
Churchill Downs Inc (NASDAQ: CHDN). Significant negative changes in investment behavior have recently occurred: its shorter term price trend turned down.
Churchill Downs Inc (NASDAQ: CHDN). Slight positive changes in fundamentals have recently occurred: significant quarterly earnings acceleration occurred.
In light of this new information we are reviewing our current Overall Rating of C. This review will be completed in the next several days.
For its fourth fiscal quarter (ending December 31), Churchill Downs Inc (NASDAQ: CHDN) has reported E.P.S. of $0.77 compared to $0.03 a year ago. For the latest four quarters through December 31, E.P.S. were $5.55 versus $11.58 for the same period a year ago.
On 2/21/24, Churchill Downs Inc (NASDAQ: CHDN) stock increased 1.0%, closing at $117.43. Moreover, above average trading volume at 140% of normal accompanied the advance. The stock has performed in line with the market over the last nine months and has declined -4.1% during the last week.
CASH FLOW
In 2022, Churchill Downs experienced a very significant reduction in cash of -$150.9 million (-42%). Sources of cash were much lower than uses. Cash generated from 2022 EBITDA totaled +$519.7 million. Non-operating sources contributed +$350.1 million (+67% of EBITDA). Cash taxes consumed -$81.5 million (-16% of EBITDA). Re-investment in the business amounted to -$3,246.0 million (-625% of EBITDA). On a net basis, debt investors provided +$2,501.5 million (+481% of EBITDA) while equity investors received -$194.7 million (-37% of EBITDA).
Churchill Downs’ Non-operating Income, %EBITDA has enjoyed a very strong overall uptrend over the period. This improvement was accompanied by stability for the Churchill Downs Peer Group. (Since 2020 Non-operating Income, %EBITDA has accelerated very sharply.) In most years, Churchill Downs was in the top quartile. Currently, Churchill Downs is upper quartile at +67% of EBITDA (+$350.1 million).
Churchill Downs’ Cash Taxes, %EBITDA has experienced a downtrend over the period. This downtrend was accompanied by an opposite trend for the Churchill Downs Peer Group. (Since 2019 Cash Taxes, %EBITDA has accelerated very sharply.) In most years, Churchill Downs was in the top quartile and third quartile. Currently, Churchill Downs is below median at -16% of EBITDA (-$81.5 million).
Churchill Downs’ Business Re-investment, %EBITDA has suffered a volatile overall downtrend over the period. This downtrend was accompanied by a similar trend for the Churchill Downs Peer Group. In most years, Churchill Downs was in the lower quartile and top quartile. Currently, Churchill Downs is lower quartile at -625% of EBITDA (-$3,246.0 million).
Churchill Downs’ Debt Investors, %EBITDA has experienced a volatile overall uptrend over the period. This improvement was accompanied by stability for the Churchill Downs Peer Group. (Since 2020 Debt Investors, %EBITDA has accelerated very sharply.) In most years, Churchill Downs was in the top quartile and lower quartile. Currently, Churchill Downs is upper quartile at +481% of EBITDA (+$2,501.5 million).
Churchill Downs’ Equity Investors, %EBITDA has suffered a volatile overall downtrend over the period. This downtrend was accompanied by an opposite trend for the Churchill Downs Peer Group. (Since 2020 Equity Investors, %EBITDA has experienced a very sharp recovery.) In most years, Churchill Downs was in the lower quartile and second quartile. Currently, Churchill Downs is lower quartile at -37% of EBITDA (-$194.7 million).
Churchill Downs’ Change in Cash, %EBITDA has exhibited little to no overall change over the period. This stability was accompanied by a downtrend for the Churchill Downs Peer Group. In most years, Churchill Downs was in the third quartile and second quartile. Currently, Churchill Downs is lower quartile at -29% of EBITDA (-$150.9 million).
Churchill Downs’ Cash, %Revenue has exhibited a volatile overall uptrend over the period. This improvement was accompanied by a similar trend for the Churchill Downs Peer Group. In most years, Churchill Downs was in the third quartile and lower quartile. Currently, Churchill Downs is lower quartile at +11%.
PROFITABILITY
Churchill Downs’ return on equity has improved very significantly since 2013. The current level of 40.6% is 5.20X the low for the period and is -50.0% from the high.
Churchill Downs’ very strong negative trend in pretax operating return significantly offset by a very strong positive trend in non-operating factors is a major performance consideration.
The productivity of Churchill Downs’ assets declined over the full period 2013-2023: asset turnover has suffered an downtrend.
Reinforcing this trend, pretax margin experienced a strong overall downtrend even as it experienced a very sharp recovery after the 2022 low.
Non-operating factors (income taxes and financial leverage) had a very significant positive influence on return on equity.
Churchill Downs’ return on equity is upper quartile (40.6%) for the four quarters ended September, 2023.
Operating performance (pretax return on assets) is at the upper quartile (7.2%) reflecting asset turnover that is substantially below median (0.35X) and upper quartile pretax margin (20.4%).
Tax “keep” rate (income tax management) is slightly below median (74.1%) resulting in after tax return on assets that is at the upper quartile.
Financial leverage (leverage) is upper quartile (7.60X).
GROWTH RATES
There are no significant differences between Churchill Downs’ longer term growth and growth in recent years.
Churchill Downs’ historical income statement growth and balance sheet growth have diverged. Revenue growth has paralleled asset growth; earnings growth has exceeded equity growth.
Annual revenue growth has been 17.2% per year.
Total asset growth has been 21.1% per year.
Annual E.P.S. growth has been 23.3% per year. (More recently it has been 192.1%.)
Equity growth has been 4.2% per year.
Churchill Downs’ consensus growth rate forecast (average of Wall Street analysts) is 9.8% — substantially below the average of the historical growth measures.
Relative to the Churchill Downs Peer Group, Churchill Downs’ historical growth measures are generally top quartile. Revenue growth (17.2%) has been upper quartile. Total asset growth (21.1%) has been upper quartile. E.P.S. growth (23.3%) has been upper quartile. Equity growth (4.2%) has been at the lower quartile.
In contrast, consensus growth forecast (9.8%) is lower quartile.
PRICE HISTORY
Over the full time period, Churchill Downs’ stock price performance has been variable and exceptional. Between April, 2013 and February, 2024, Churchill Downs’ stock price rose +822%; relative to the market, this was a +196% gain. Significant price move during the period: 1) April, 2020 – February, 2021: +130%.
TOTAL INVESTMENT RETURNS
Current annual total return performance of -2.2% is below median relative to the S&P 500 Composite.
In addition to being below median relative to S&P 500 Composite, current annual total return performance through January, 2024 of -2.2% is slightly above median relative to Churchill Downs Inc Peer Group.
Current 5-year total return performance of 21.7% is upper quartile relative to the S&P 500 Composite.
Through January, 2024, with upper quartile current 5-year total return of 21.7% relative to S&P 500 Composite, Churchill Downs’ total return performance is upper quartile relative to Churchill Downs Inc Peer Group.
VALUATION BENCHMARKS
Relative to S&P 500 Composite, CHDN’s overall valuation is high. The highest factor, the price/equity ratio, is upper quartile. Ratio of enterprise value/revenue is near the upper quartile. Ratio of enterprise value/assets is above median. Price/earnings ratio is slightly above median. The lowest factor, the ratio of enterprise value/earnings before interest and taxes, is slightly below median.
Relative to Churchill Downs Peer Group, CHDN’s overall valuation is high. The highest factor, the price/equity ratio, is upper quartile. Ratio of enterprise value/revenue is upper quartile. Ratio of enterprise value/assets is above median. Ratio of enterprise value/earnings before interest and taxes is at median. The lowest factor, the price/earnings ratio, is below median.
Churchill Downs has a major value gap compared to the median valuation. For CHDN to achieve median valuation, its current ratio of enterprise value/revenue would have to fall from the current level of 5.66X to 3.77X. If CHDN’s ratio of enterprise value/revenue were to fall to 3.77X, its stock price would be lower by $-60 to $57.
For CHDN to fall to lower quartile valuation relative to the Churchill Downs Peer Group, its current ratio of enterprise value/revenue would have to fall from the current level of 5.66X to 2.68X. If CHDN’s ratio of enterprise value/revenue were to fall to 2.68X, its stock price would decline by $-95 from the current level of $117.
VALUE TARGETS
CHDN is expected to continue to be a major Value Builder reflecting capital returns that are forecasted to be above the cost of capital.
Churchill Downs’ current Price Target of $304 represents a +159% change from the current price of $117.43.
This high appreciation potential results in an appreciation score of 80 (only 20% of the universe has greater appreciation potential.)
Notwithstanding this high Appreciation Score of 80, the low Power Rating of 27 results in an Value Trend Rating of C.
Churchill Downs’ current Price Target is $304 (+86% from the 2022 Target of $163 and +159% from the 02/21/24 price of $117.43). This dramatic rise in the Target is the result of a +108% increase in the equity base and a -11% decrease in the price/equity multiple. The forecasted decline in return on equity has a very large negative impact on the price/equity multiple and the forecasted increase in cost of equity has a very slight negative impact as well. Partially offsetting these Drivers, the forecasted increase in growth has a very large positive impact.
PTR’s return on equity forecast is 41.4% — significantly below our recent forecasts. Forecasted return on equity enjoyed a dramatic, variable increase between 2014 and 2022. The current forecast is significantly above the 2014 low of 8%.
PTR’s growth forecast is 43.0% — substantially above our recent forecasts. Forecasted growth exhibited a slight, erratic increase between 2014 and 2022. The current forecast is significantly above the 2018 low of 1%.
PTR’s cost of equity forecast is 15.1% — in line with recent levels. Forecasted cost of equity suffered a dramatic, variable increase between 2014 and 2022. The current forecast is well above the 2014 low of 6.2%.
At Churchill Downs’ current price of $117.43, investors are placing a positive value of $82 on its future investments. This view is consistent with the company’s most recent performance that reflected a growth rate of 20.0% per year, and a return on equity of 69.0% versus a cost of equity of 14.7%.
PTR’s 2024 Price Target of $304 is based on these forecasts and reflects an estimated value of existing assets of $48 and a value of future investments of $256.
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