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Coverage Initiation: Churchill Downs
Value Line recently initiated coverage of Churchill Downs (CHDN) in its flagship product, The Value Line Investment Survey. The company is a provider of pari-mutuel horseracing, casino gaming, and entertainment services. It offers gaming products through its casinos in Mississippi and slot and poker operations in Louisiana and Florida. The company is based in Kentucky and was organized as a corporation in the state in 1928. As of December 31, 2012, it had roughly 2,300 full-time employees, with the number of part-time employees varying throughout the year due to the seasonal nature of its live racing business.
Churchill Downs has four operating segments. Its Racing Operations (41% of 2012 sales) includes Churchill Downs Racetrack in Louisville, Kentucky, the internationally known home of the Kentucky Derby since 1875. This division also includes: Arlington International Race Course, a thoroughbred racing operation in Illinois; Calder Race Course, a thoroughbred racing operation in Florida; and Fair Grounds Race Course, a thoroughbred racing operation in New Orleans. Revenues at this group are generated from commissions on wagering at these racetracks, simulcast host fees earned from other wagering sites, admissions, sponsorships, licensing rights, and food and beverage sales.
The company’s Gaming segment (31% of 2012 sales) includes the following holdings: Riverwalk Casino Hotel in Vicksburg, Mississippi, which was acquired in October of 2012; Harlow’s Casino Resort & Spa in Greenville, Mississippi; Calder Casino in Miami Gardens, Florida; Fair Ground Strokes in New Orleans; and Video Services in Louisiana. Gaming sales are primarily generated from slot machines, poker rooms, table games, and hotel and food sales.
The Online Business (25% of 2012 sales) primarily includes: TwinSpires, which is a simulcasting and interactive wagering hub in Oregon; Velocity, focused on high wagering volume international customers; Luckity, a business that offers 20 online games with outcomes based on live horseraces; and HRTV, a horseracing television channel. Revenues at this segment are generated from wagering through the Internet or phone on pari-mutuel events.
Finally, the Other Investments division (3% of 2012 sales) is comprised of: United Tote Company, which manufactures and operates pari-mutuel wagering systems for racetracks and OTBs; Bluff Media, a multimedia poker content brand and publishing company; and an equity investment in Miami Valley Gaming & Racing, a joint venture to develop a harness racetrack and video lottery facility in Ohio. United Tote generates the majority of sales in this group.
The industry in which Churchill operates is highly competitive, with a large number of participants. Competition for consumers’ discretionary spending comes from other spectator sports, entertainment, and gaming options. Traditional and Native American casinos, video lottery terminals, and state-sponsored lotteries are all vying for individuals’ attention and dollars. Internet-based interactive gaming and wagering, both legal and illegal, has been particularly concerning for the company.
Churchill faces certain risks in its business, including regulatory risk. Since its racing operations are highly regulated, any change in the federal or state laws pertaining to its operations could hurt results. The failure to obtain certain licenses, registrations, or permits would undoubtedly have an adverse impact on its business. Elevated taxes also have a harmful effect on profitability. Recent increases in federal payroll taxes have already impacted first-quarter results. Another risk is that the popularity of horse racing has been declining. The number of people attending and wagering on live horse races in North America has decreased in recent years, owing to increased competition from entertainment alternatives. Weather-related risks are also a concern. For example, in April of last year, a hailstorm damaged Churchill Downs Racetrack. Any severe weather during the Kentucky Derby could also have a significant impact on results.
The company generates strong cash flows, and maintains a strong balance sheet, with no long-term debt (as of December 31, 2012) and about $37 million in cash, or more than $2 per share. As a result, it has been able to make annual dividend payments over the past few years. Its financial situation has also allowed it to repurchase stock from time to time.
Business prospects for Churchill Downs remain favorable. The company will likely continue to see strong organic growth from its Online Business group, thanks to solid gains in handle (the amount of money wagered). Recent acquisitions, including Riverwalk, are also likely to support solid gains in the coming quarters.
At the time of this article’s writing, the author did not have any positions in any of the companies mentioned.