Wait For a Better Price Before Placing a Bet On Churchill Downs

Churchill Downs NASDAQ: CHDN stock hit a record high share price the day before it released fourth quarter and full year 2020 earnings. But shares of CHDN stock have dropped over 7% in late afternoon trading after the release.

The company missed earnings per share estimates by 8 cents and revenue for the year was down, as expected. For the full year, Churchill Downs posted $1.05 billion, which was a 21% decline from the $1.32 billion it posted in 2019.

While most known for its iconic racetrack of the same name, Churchill Downs operates resorts and casinos throughout the United States. The company also occupies a space in the online sports betting world.

2021 is shaping up to be a better year for the company. However CHDN stock may have to endure some growing pains before taking the next leg up.

How Much Is An Iconic Brand Worth?

Even if you’ve never placed a single bet on a horse, you would probably be able to pick a photo of Churchill Downs out of a lineup. The Kentucky Derby is the longest-running event in sports history. In 2020, the event went on albeit six months later than normal and without the fancy hats and mint juleps.

However, as of now the run for the roses will take place in its traditional slot on the first Saturday in May. And this year the company is planning on having the iconic racetrack filled with up to 50% its normal capacity.

Like the city that hosts the Super Bowl, the Kentucky Derby is big business not only for Churchill Downs but for the city of Louisville which is forecasting a $200 million economic benefit from this year’s event.

The Derby is big business, but it’s not the most compelling reason to consider CHDN stock.

More Than a Racetrack

Few things go together as well as horse racing and gambling. And gambling is a large part of Churchill Downs revenue stream. Per the company’s website, the company owns and operates:

• Three pari-mutuel gaming entertainment venues in the Commonwealth of Kentucky.
• TwinSpires, an online horse race wagering site, online sportsbook and iGaming platform in the U.S.
• Multiple casinos in eight states comprised of 11,000 slot machines and video lottery terminals and 200 table games.

Online sports betting will continue to grow in popularity as more states look for revenue streams to patch Covid-ravaged budgets. In an investor presentation the company issued in December they made it clear that they are well-positioned to be a player if online gambling opens in key states such as New York, Ohio, and Florida. And as we saw in 2020, once brick-and-mortar casinos re-opened there was no shortage of interest.

Capital Expenditures May Be a Drag on Earnings

With the stock up near-record high, I think the recovery is mostly priced in. But what may be causing the dip is the company’s capital expenditure plan for 2021. The company is planning to spend $145 million to complete construction at Turfway Park with the plan for a grand opening in 2022.

Furthermore, the company is dusting off plans for a $300 project at the company’s Churchill Downs racetrack that will include construction of a seven-story, 156 -room hotel and a 900-machine historical racing machine. The plans are not finalized but the company said investors should expect more information in the coming months.

The company is currently in a covenant relief period through June of this year that will allow the company the flexibility to invest in these, and other, projects as well as to continue its $26 million annual dividend.

Don’t Be In a Rush to Buy

Churchill Downs is being aggressive in its expansion plans. And being in the online sports betting will be a consistent source of revenue. However, that is a crowded space and it’s going to continue to get crowded. Hosting the Derby with fans this year will help, but by itself doesn't appear to be a good enough reason to start paying what looks like a premium for CHDN stock