Truist Securities analyst Barry Jonas took a second look at Churchill Downs after the company suspended horse racing at its titular track in Kentucky. The move followed what Churchill Downs called an “unusual number of horse injuries over the previous month resulting in 12 equine fatalities.”
Company CEO Bill Carstanjen took the measure out of “an abundance of caution,” saying the dozen horse deaths were “deeply upsetting and absolutely unacceptable.”
CHDN shares fell six percent on news of the temporary shutdown, during a day in which the Standard & Poor’s index was stable. The drop cost the company $650 million of market capitalization, according to Jonas, who called management yesterday about the suspension, which will last indefinitely, beginning tomorrow.
Races slated for Churchill Downs will be relocated to sister facility Ellis Park beginning this Saturday. Jonas forecast “limited financial impact … from this shift.”
Despite the Kentucky Horse Racing Commission’s finding that “no single factor identified as the cause of the deaths” at the oval, the company “paused track-based incentives and limited purse payouts to the top five finishers,” wrote Jonas, who added, “We think prior policies may have driven some trainers to race unhealthy horses.”
Although Jonas deemed the cash-flow contribution from live racing at Churchill Downs’ iconic twin-spired racetrack “relatively immaterial,” he reported to investors, “Management is taking the fatalities and potential for repetitional risk very seriously.”
Even before the current investigation is concluded, Jonas wrote, new safety measures are being implemented at the Louisville track. He thought any selloff in CHDN stock would be “short-lived” and that the company had 11 months to work out any complications before its next tentpole event, the 150th Kentucky Derby.
Jonas put a “Buy” rating on Churchill Downs stock, predicting the company would double its cash flow to $1.4 billion by 2026 or 2027. He noted that, for all the equine-health fallout, this year’s Kentucky Derby was the most lucrative to date. He was also optimistic about the company’s Paddock Project, which he predicted would pay for itself within eight years at a return on investment exceeding 10 percent annually.
The $200 million Paddock Project aims to improve the back-of-track area, increasing guest seating from 5,000 square feet to 12,000 square feet. Not only will the paddock area seat 2,400 people once the expansion is finished, racing spectators will be afforded 3,600 premium-reserved seats and 3,250 additional standing-room places. It’s the final stage of a three-legged enhancement program.
“This is one of the most significant construction projects in the history of Churchill Downs Racetrack, because it significantly impacts what we consider to be the heart of the property,” Carstanjen told a local TV station.
Noting that CHDN management’s present focus was on a successful 2024 Run for the Roses, Jonas wrote, “We believe the new initiatives should drive confidence in [Churchill Downs’s] commitment to the safety of the race participants.”
As for the expansion, “The temporary CDRT closure may actually allow construction of the Paddock Project to progress without potential disruption from live racing,” Jonas concluded.
