Churchill Downs Benefits from Virginia Court Ruling, Says Analyst

Posted on: October 16, 2023, 06:02h. 

Last updated on: October 18, 2023, 10:56h.

Todd Shriber @etfgodfather Read More
Expertise: Financial, Gaming Business, Mergers and Acquisitions.

Virginia’s Supreme Court recently ruled that skill games don’t have First Amendment protections and are again illegal in the state. That decision could benefit Churchill Downs (NASDAQ: CHDN).

Virginia skill gaming terminals slot machines
A person plays a Queen of Virginia skill gaming machine inside a Richmond restaurant. Virginia’s Supreme Court ruled against the devices, potentially benefiting Churchill Downs. (Image: Richmond Times-Dispatch)

That’s the take of Truist Securities analyst Barry Jonas, who, in a new note to clients, observed that Virginia’s refreshed ban on skill games is a “meaningful positive” for Churchill Downs.

We see the state Supreme Court decision as a big win for the company just months following the Exacta transaction closing,” Jonas wrote. “This ruling comes 4 months after Kentucky issued a similar ban, and speaks to CHDN management’s political savvy.”

The gaming company currently has 2,750 historical horse racing machines in Virginia and would like to boost that count to 5,000. Jonas noted that allowing the 9,000 skill game machines to continue operating in Virginia would have been a drag on Churchill’s HRM revenue opportunity set.

Virginia Important Market for Churchill Downs

Virginia’s highest court ruling to again impose the ban on skill games devices is pivotal for Churchill Downs’ growth ambitions in the Cavalier State.

While some investors more readily associate the operator with horse racing and its eponymous race track in its home state of Kentucky, Virginia is a new growth frontier for the company. At the state level, Virginia could catalyze long-term growth for Churchill Downs. The operator has a 50% stake in a Richmond casino project and a growing number of HHR venues in the state. That proposed gaming venue is expected to have 1,800 slot machines, 100 table games, and a sportsbook.

Churchill’s established Virginia footprint consists of seven Rosie’s 777 Gaming Emporiums, and the operator is planning to add the Rose Gaming Resort in Dumfries.

“Following the Supreme Court’s ruling that the lower court acted improperly, we believe recourse options for skill-based companies are limited,” added Jonas. “While it’s not clear exactly when the ban would be implemented, we think it could occur quickly and have a relatively immediate benefit to CHDN’s [Virginia] properties.”

Analysts Bullish on Churchill Downs

Although the stock is up a middling 6.60% year-to-date, Churchill Downs remains one of Wall Street’s favorite ideas among gaming equities. Virginia is one of the factors supporting that bullish outlook.

It has ~$1.1B in development spend earmarked for the next year and a half to increase the portfolio of slots/historical racing machines by 21%, table games by 9%, and rooms by 25% into 2025,” Capital One Securities analyst Dan Guglielmo wrote in a note to clients last week.

Guglielmo initiated coverage of Churchill Downs with an “overweight” rating and a $144 price target, calling the name a potential standout in the casino sector. His price forecast implies upside of 27.7% from the stock’s Oct. 16 close.