The Only Thing Missing for Churchill Downs is More Guests

Churchill Downs (NASDAQ:CHDN) will report first-quarter 2021 earnings on April 21 after the market closes. The company that is most known for its iconic horse racing event and facility, has become a significant player in the online and on-site gaming sectors. The company continues to have aggressive expansion plans, but those seem to be limited by one salient factor. They need more guests.

On May 1, 2021 the longest-running event in sports history will write its 147^th chapter. The Kentucky Derby will take place at the iconic Churchill Downs. And, unlike the event that took place in November of last year, there will be spectators in attendance.

In the company’s report at the JPMorgan Chase (NYSE:JPM) Gaming, Lodging, Restaurant & Leisure Forum, management reiterated plans to sell up to 50% of the reserved seating at Churchill Downs for the running of the Derby. Furthermore, the company indicated it may open up some general admission seating if Covid-19 guidelines allow.

After a year in which there were no spectators at many sporting events, any amount of crowd noise makes a huge difference. But in terms of the company’s bottom line, the benefit may be more muted.

CHDN Stock Has Been an Exceptional Investment

In the last five years, CHDN stock has climbed 333%. To put it in a simple context, a $1,000 investment made five years ago is now worth $3,339. And that’s not including the modest dividend that the company pays.

A significant reason for that growth is that Churchill Downs has become one of the big names in the on-site and online gaming sectors. Its TwinSpires site began as a location for online horse race wagering. Since then it has expanded into an online sportsbook and iGaming platform.  

The growth of online gaming is well documented. In January, the state of Michigan opened up for online sportsbooks and New York is following suit. Mobile and online sportsbooks are expected to be available in the Empire State in late 2021.

In addition to its online presence, Churchill Downs operates 10 regional gaming properties in eight states.

Capital Expenditures Reflect Reality

In February, I expressed a concern about CHDN stock due to its planned $300 million renovation to the Churchill Downs Racetrack Hotel and Historical Racing Machine (HRM) facility. However in the company’s presentation at the JPMorgan forum they announced they are temporarily pausing that initiative.

That puts the company’s anticipated 2021 capital expenditures on par with last year’s number. But the reason the decision makes sense is also the one piece the company is missing at this time.

The city of Louisville is forecasting a $200 million economic benefit from this year’s Run For the Roses. And that’s in a year when attendance will be half of what it could be. This is a narrative that played out across the world in hundreds of other venues. It’s not unique to Churchill Downs. But nevertheless, it remains a piece of the puzzle that will limit growth.

What Should Investors Expect From Earnings?

At this point, analysts are projecting Churchill Downs to deliver earnings per share of 56 cents with revenue of around $285 million for the quarter. Those would be both sequential and year-over-year gains.

Even with the limited attendance, the company is heading into what has historically been its strongest quarter with the Derby taking place in May. Analysts have a consensus price target of around $200 which suggests that CHDN stock is fairly priced. However, KeyCorp (NYSE:KEY) raised its price target from $235 to $250 in early March.

After pushing above $250 in early March, CHDN stock has been in a bearish pattern. The stock recently crossed below its 50-day moving average. It will be important to see if the earnings report puts a floor on the stock’s decline. If it doesn’t, long-term investors may want to use that opportunity to buy the dip.

The company has more than one revenue stream. All it needs now is a standing-room-only crowd.