Churchill Downs Could Be Boosted by New Derby Projects

Posted on: September 30, 2024, 03:44h. 

Last updated on: September 30, 2024, 04:27h.

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

Shares of Churchill Downs (NASDAQ: CHDN) could get a lift from the operator’s plans to continue improving its namesake Kentucky racetrack in advance of the Kentucky Derby next May.

Churchill Downs
Mystik Dan winning the Kentucky Derby in May. An analyst is bullish on Churchill Downs’ expansion plans at the Kentucky track. (Image: ESPN)

Truist Securities analyst Barry Jonas recently met with Churchill executives at the storied track and came away constructive on the potential impact of enhancements. He has a “buy” rating on the stock with a $166 price target, which implies upside of about 20% from current levels. The gaming company is planning to spend $80 to $90 million to renovate the grandstand at its eponymous Kentucky racetrack.

The announcement was made in conjunction with the gaming company’s second-quarter earnings release, and the operator expects those improvements will be finalized before the 2025 edition of the Derby. Jonas estimates a full return on investment will be realized in eight years.

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,” observed the analyst.

Churchill is committing to new amenities at the iconic Kentucky track as an avenue for supporting the broader suite of Derby Week festivities and races. In 2023, handle for Derby Week and the Derby itself topped records.

Derby Still a Prime Catalyst for Churchill Downs Stock

In his note, Jonas called the Kentucky Derby “the crown jewel of the portfolio” for Churchill Downs, and that assessment is accurate because ticket sales alone account for 60% of the operator’s Derby Week revenue. Jonas said the gaming company has more room to continue improving the track via capital expenditures.

That’s pivotal because prior enhancements at the track already paid off. The Derby is one of the most in-demand live sporting events in the US as highlighted by the fact demand for premium seating continues to outpace supply, according to Churchill management. A third of ticket sales for the “run for the roses” are tied to three- to seven-year contracts that buyers cannot cancel. The other two-thirds are sold in advance of the race.

As for Churchill’s TwinSpires, which broke Derby records last year as well, Jonas called it “slow, steady, and resilient,” noting it’s benefiting from horseracing deals with DraftKings and FanDuel.

In addition to its portfolio of racetracks, Churchill Downs operates 12 regional casinos across 10 states, and historical horse racing (HHR) facilities in Kentucky, Virginia, and shortly, in New Hampshire. Jonas noted that the stock trades at a premium to others in his coverage universe, but cautioned that Churchill isn’t directly comparable to traditional regional casino operators.

Derby City Can Find Its Footing

Jonas also noted that the slow start for Derby City Gaming isn’t overly concerning. The $90 million historical horse racing (HHR) venue opened last December in downtown Louisville and has been somewhat sluggish, but that’s not causing management to fret.

Churchill executives are “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,” observed the analyst.

Jonas added that expansion of Churchill’s HHR facility in Owensboro, Ky. is on pace to be completed and open early next year.