Churchill Downs Stock Deserves Premium Multiple, Offers Significant Upside Potential, Says Analyst


Racetrack operator Churchill Downs (NASDAQ:CHDN) has avenues for equity upside and warrants a premium valuation relative to peers.

Churchill Downs
Churchill Downs
Scenes from this year’s Kentucky Derby. An analyst is positive on Churchill Downs stock. (Image: Associated Press)

Those are the sentiments of Macquarie analyst Jordan Bender who, in a note to clients today, initiated coverage of the gaming stock with an “outperform” rating and a $254 price target. That forecast implies upside of 32 percent from the June 17 close.

In highlighting Churchill’s positioning as a unique, luxury brand in the gaming space, Bender points to the Kentucky Derby as one of the favorable factors for the stock.

Churchill Downs owns one of the most iconic assets in the United States, Churchill Downs Racetrack, home to the Kentucky Derby, the longest running sporting event in the country,” said the analyst. “The irreplaceable asset, which has historically generated ~25 percent of company earnings before interest taxes, depreciation and amortization (EBITDA) in a single day, has few true comps and we believe it should garner a premium valuation multiple even to a comp set of luxury and unique brands across the globe.”

Analysts are mostly bullish on Churchill stock with the consensus Wall Street price target residing at $249, but the shares are lower by 1.50 percent year-to-date, making it one of the 2021 laggards among gaming equities.

Churchill Stock Ample Catalysts for Rebound

Bender says Churchill has multiple tailwinds that could propel the shares higher, including dominant positioning in the historical horse racing (HRR) market in Kentucky.

The analyst forecasts that already growing segment will reach $750 million at maturity and with Churchill holding three of the state’s eight licenses, the operator can “drive additional value, particularly to the underserved Louisville market.”

Bender is also enthusiastic about the outlook for Churchill’s TwinSpires online betting brand. Macquarie forecasts the US online sports betting/real money gaming segments will vault to $19.2 billion in 2025 and $37.7 billion in 2030 from $3.1 billion in 2020.

“While maintaining a profitable approach to the burgeoning market share opportunity, we still expect CHDN to be a winner and drive shareholder value,” said the analyst.

He adds that management’s disciplined approach is a sign there’s more unique value to be unearthed in Churchill’s online strategy. TwinSpires could account for 16 percent of Churchill’s 2022 EBITDA, according to Macquarie.

Growth, Shareholder Rewards Merit Premium

Over the past decade, Churchill grew EBITDA at a mid-teens compound annual growth rate — good for one of the best paces in the gaming industry. As Macquarie’s Bender notes, over the past five years, the operator’s shareholder rewards program — buybacks and dividends — was topped only by Las Vegas Sands (NYSE:LVS) and Wynn Resorts (NASDAQ:WYNN).

He forecasts a potential increase in dividends and share repurchase plans if the company proceeds with selling Arlington International Racecourse in Illinois.

“This, in our view, will be accompanied by accretive capital projects, which we believe could be announced in the near-term based on previous management commentary on prior earnings calls,” said Bender.

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