J.P. Morgan investment bankers initiated coverage of Churchill Downs with analyst Omer Sander taking a “neutral” stance on the stock. His year-end price target is $243 a share. CHDN ended trading Thursday at $219.48 per share.
As the stock rating might imply, Sander took a cautious approach to the company. “Our 2023 estimates are below consensus, as we assume a high-single-digit same-store revenue decline taking into account a downbeat macro [economy], similar our assumptions for peers.” He added, “We see better value elsewhere in gaming and look at the stock as fairly valued … with shares having relatively outperformed peers.”
That outperformance took the form of an eight percent decline in 2022 value, by contrast with gaming stocks’ average 25 percent dropoff.
Sander liked Churchill Downs’ growth potential for pari-mutuel historical horse racing machines, slot-like Class II devices that the company has been deploying in Kentucky and Virginia. The analyst believes these will complement to new capex projects coming through at flagship Churchill Downs Racetrack next year “and offsetting potentially softer same-store revenues.”
Other states in which Churchill Downs is expanding historical horse racing devices are Louisiana and New Hampshire, with the goal of achieving an 11,000-machine installed base, up from the current 7,000. Sander also liked the company’s wholly owned and diverse casino division, as well as its cash-flow generation (“solid”) and its leverage, which is going down and “providing more capital optionality.”
Sander estimates that CHDN trades at 11 times cash flow, buoyed by the high valuation (20 times EBITDA) placed on the titular racetrack. The company’s absorption of Peninsula Pacific Entertainment gives it six slot parlors in Virginia (with a seventh on the way) and a pair of casinos. Gambling houses account for 47 percent of Churchill Downs’ cash flow, compared to 42 percent from live and historical horse racing, and 11 percent from the company’s TwinSpires online segment, which recently withdrew from non-horse racing sports betting.
