A weekend trip to Kentucky left Truist Securities analyst Barry Jonas “impressed” with the Churchill Downs empire. Jonas said there’s “meaningful upside” and “organic growth” in the company, in a September 30 investor note.
Jonas met with Churchill Downs CEO William Carstanjen, CFO Marcia Dall, and Senior Vice President of Investor Relations Sam Ulrich. He attended the evening racing event Twilight Thursdays at the company’s titular racetrack, as well as visiting several Churchill Downs-owned casinos in Kentucky.
For Jonas’s money, Churchill Downs’s Kentucky Derby remains “the crown jewel of the portfolio.” He quantified this by pointing to 20.1 million viewers last spring, the race’s strongest showing in 35 years, as well as being broadcast on 10 NBC networks in 174 jurisdictions, on a contract that runs through 2032. Social-media impressions vaulted 60 percent from 2023 to 170 million.
Ticket sales remain the bedrock of Derby revenues, comprising 60 percent. Parimutuel commissions account for another 25 percent, followed by licensing and sponsorships (10 percent) and broadcast rights (six percent).
Of ticket revenue, a third is in the form of three- to seven-year contracts that cannot be canceled. Demand for these seats continues to exceed supply, according to Churchill Downs management. The remaining two-thirds are sold in advance of the race.
With the 151st running of the Kentucky Derby looming in 2o25, Churchill Downs continues to pursue capex improvements for its signature facility. The plan is to add 8,300 seats and amenities that can host 2,800 guests. The capital outlay is anticipated to be $80 million to $90 million, with a full return on investment within eight years.
Reacted Jonas, “We see multiple opportunities for additional value enhancing projects at [the track], given what we see as sizable consumer demand and opportunities to increase spend (and value) per Derby attendee.”
Jonas also dropped in on Derby City Gaming & Hotel and the Derby City Downtown casino. Both are equipped with historical horse racing machines (HHR).
The analyst was particularly taken with Derby City Gaming, which “offers a greater diversity of gaming content, as well as a pleasant hotel experience,” including 1,300 HHR. He noted that the nearest competitor, Caesars Southern Indiana, is a 30-minute drive away.
A lagging COVID recovery in the Louisville area has hampered the run-up of Derby City Gaming, according to Jonas. He reported that Churchill Downs brass is “unconcerned with the modest ramp, pointing to Newport and Turfway as examples of other successful properties that got off to a slow start before improving.”
As for having two Derby City-branded casinos, despite their proximity, company bosses said they’ve seen scant cannibalization, especially as the downtown property appeals more to conventioneers and tourists.
Jonas reported that the downtown location is seeing an influx of bars, restaurants, and offices nearby, which bodes well for its prospects. His near-term expectations were only “modest.” He added that both Derby City locations are well stocked with Light & Wonder’s Ultimate Fire Link machines and that he anticipated that further HRM optimizations would “drive upside for both properties, potentially offsetting any macro weakness.”
The Truist analyst further reported that expansion of an HHR casino in Owensboro, Kentucky, remains on course for an opening in early 2025. He felt it will particularly benefit from the enlargement of a nearby Philip Morris factory.
He added that Churchill Downs “expects to make a small investment” in 2025, without specifying where. However, the company has the option of developing an additional HHR parlor in the annex to its Oak Grove racing oval.
“We still see sunshine in the rain,” Jonas wrote of Virginia, where severe rainstorms had damaged the in-progress Rose Gaming Resort. That casino is now slated for a late-2024 debut, pushed back from late September.
Management was said to be now looking at a mid-October to end-of-month rollout of The Rose. A large catchment area of 6.5 million largely affluent people is further cause for managerial optimism.
Regulatory approvals are currently holding up the forward movement of an HHR parlor destined for rural Henrico County. If green-lit, it will open in the fourth quarter of 2025. Jonas projected an investment of $30 million to $40 million, with a full return on investment within five years.
Churchill Downs executives waxed confident that they would be able to deploy their full 5,000-machine HHR allotment in Virginia. A strong capture of the Richmond area (where Churchill Downs had been thwarted in its pursuit of an urban casino) is expected.
Nor does Churchill Downs want to stop there, expressing a desire for more than 5,000 HHR in the Cavalier State. “On the competitive front, [management] remains alert for new forms of illegal skill based gaming and is confident local authorities will ensure proper enforcement,” Jonas added.
The analyst described the performance of Churchill Downs’s online TwinSpires arm as “slow and steady … resilient.” Management expects to continue capitalizing on the shift from in-person to online parimutuel wagering, as well as executing on recent deals with DraftKings and FanDuel to continue broadening awareness of horse racing.
Jonas added, “While they have noted low-end consumer pressures and potential election related noise, the trends are generally consistent.” He didn’t delve into Churchill Downs’s Terre Haute Casino, other than to note that it is “promising.”