The COVID-19 pandemic had a profound effect on the casino gambling industry, leading to widespread closures and reduced operations at many land-based casinos. In response, there was a notable shift towards online gambling platforms, which saw a significant rise in demand as individuals sought safer ways to engage in gaming from home.

Looking forward, the casino gambling sector is expected to experience substantial growth owing to the increasing popularity of gambling and the expansion of online platforms. According to Research and Markets, the market's gross gaming revenue is forecasted to grow from $150.29 billion in 2024 to $191.36 billion by 2029, at a CAGR of 4.95%.

That being said, watching out for Churchill Downs Incorporated (CHDN) in this promising environment could be a strategic move. The company is well-positioned to capitalize on the expanding gambling and entertainment industry. To understand this potential, let's examine the industry trends and CHDN’s role more closely.

The U.S. commercial gaming industry achieved record revenues for the third consecutive year in 2023. The industry’s resilience was evident as consumers continued to show strong interest in traditional casino games available at the 486 commercial casinos nationwide and newer offerings in iGaming and sports betting.

Moreover, the sector demonstrated resilience and robust consumer demand despite broader economic issues such as persistent inflation and high interest rates.

Furthermore, betting is critical in horse racing as well, with billions of dollars wagered annually. The horse and sports betting market is experiencing notable growth, driven by diverse betting options for races and other sports events. The sector’s expansion is further supported by increasing globalization and digital connectivity.

Integrating online betting platforms and live streaming services has transformed traditional wagering and viewing experiences, attracting a younger, more tech-savvy audience. According to Technavio, the global horse and sports betting market is projected to grow by $221.4 million from 2024 to 2028, with an estimated CAGR of over 11.06%.

Given these trends, CHDN stands to benefit significantly. With a market capitalization of $9.72 billion, CHDN excels in racing, online wagering, and gaming entertainment. It prominently features its flagship event, the Kentucky Derby. The company operates 14 live and historical racing venues across three states, nine casino gaming properties in eight states, and 13 retail sportsbooks.

Additionally, CHDN runs an online horse racing wagering platform in the United States. Its diverse business segments include Live and Historical Racing; TwinSpires; and Gaming which underscore the company’s extensive market presence.

CHDN’s shares have shown promising performance, increasing 8.6% over the past six months and 8.8% over the past year to close the last trading session at $132.43. Let’s now explore the factors that might influence CHDN’s performance in the near term.

Recent Developments

On July 24, CHDN announced an $80-$90 million renovation of the existing grandstand at Churchill Downs Racetrack. The project will upgrade ticketed seating options while significantly enhancing amenities for all guests in the grandstand area.

Construction on the Grandstand Club and Pavilion has begun this month, with completion planned for the 151st Kentucky Derby in May 2025. Modernizing facilities and enriching guest experiences could bolster CHDN's growth prospects by attracting more visitors and increasing overall revenue.

On May 15, CHDN announced the opening of its new 122-room hotel and event center at Terre Haute Casino Resort. The company opened the 400,000-square-foot regional entertainment venue’s casino floor on April 5, 2024, with 1,000 slot machines, 36 table games, and a state-of-the-art sportsbook.

The new infrastructure is poised to bring thousands of visitors from the region to enjoy an unparalleled gaming experience and make it a premier entertainment destination. This, in turn, could expand the company’s customer base and improve its growth prospects.

Sound Historical Growth

Over the past three years, CHDN’s revenue has grown at a CAGR of 21.6%. Its operation income (EBIT) and total assets increased at CAGRs of 37% and 34.1%, respectively. In addition, the company’s EBITDA rose at a CAGR of 33.8% during the period.

Moreover, during the same time frame, the company’s net income and EPS grew at respective CAGRs of 25.9% and 28.7%.

Robust Financials

During the second quarter of fiscal 2024, which ended on June 30, 2024, CHDN’s total net revenue increased 15.9% year-over-year to $890.70 million. Its operating income stood at $330 million, up 46.3% year-over-year. Moreover, the company’s adjusted EBITDA hit an all-time high of $444.80 million, up 22.3% year-over-year.

Furthermore, net income and net income per common share attributable to CHDN rose 46.4% and 50% from the prior year’s period to $209.30 million and $2.79, respectively. In addition, as of June 30, 2024, CHDN’s total assets amounted to $7.17 billion, up from $6.96 billion as of December 31, 2023.

Favorable Analyst Estimates

Analysts expect CHDN’s revenue for the fiscal third quarter (ending September 2024) to grow 10.8% year-over-year to $634.35 million. Plus, the consensus EPS estimate of $1.08 for the ongoing quarter indicates an improvement of 24.6% from the previous year’s period.

Also, the company has topped consensus revenue estimates in each of the trailing four quarters, which is impressive. Looking forward, for the fiscal year ending December 2024, Street expects CHDN’s revenue and EPS to increase 12.1% and 23.8% from the previous year to $2.76 billion and $6.18, respectively.

Furthermore, the company’s revenue and EPS for the next fiscal year ending in December 2025 are expected to grow 10.5% and 23% year-over-year to $3.05 billion and $7.60, respectively.

Mixed Profitability

CHDN’s trailing-12-month gross profit margin of 34.34% is 6.9% lower than the 36.87% industry average. Its trailing-12-month levered FCF margin of negative 5.86% is unfavorably compared to the industry average of 5.39%. Furthermore, its trailing-12-month asset turnover ratio of 0.38x is 61.7% lower than the industry average of 0.99x.

However, the company’s trailing-12-month EBITDA margin of 32.74% is 186.8% more than the industry average of 11.42%. Similarly, its trailing-12-month net income margin of 15.61% is 233.8% higher than the industry average of 4.68%.

Also, the stock’s trailing-12-month ROCE, ROTC, and ROTA of 43.24%, 7.51%, and 5.69% are 270.2%, 20.9%, and 33.5% higher than the industry averages of 11.68%, 6.22%, and 4.26%, respectively.

Stretched Valuation

In terms of forward non-GAAP P/E, CHDN is trading at 21.43x, 46.6% higher than the industry average of 14.63. The stock’s forward EV/Sales multiple of 5.24 is 353.9% higher than the industry average of 1.15x. Likewise, its forward EV/EBITDA of 12.32x is 30.2% higher than the industry average of 9.47x.

Additionally, CHDN’s forward Price/Sales multiple of 3.52 is 324.7% higher than the industry average of 0.83x. Furthermore, its forward Price/Book ratio of 8.51x is 244.9% higher than the industry average of 2.47x.

POWR Ratings Reflect Uncertainty

CHDN’s mixed fundamentals are reflected in its POWR Ratings. The stock has an overall rating of C, which translates to Neutral in our proprietary rating system. The POWR Ratings are calculated by taking into account 118 different factors, with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight distinct categories. CHDN has a B grade in Sentiment, which is in line with its optimistic analyst estimates. In addition, the stock has a C grade for Quality, which is justified by its mixed profitability metrics.

The stock also has a D grade in Valuation, consistent with its higher-than-industry valuation. Within the Entertainment - Casinos/Gambling industry, CHDN is ranked #20 out of 25 stocks.

Beyond what I have stated above, we have also given CHDN grades for Growth, Momentum, and Stability. Get all CHDN ratings here.

Bottom Line

The rise of online gambling, betting, and wagering in recent years has propelled the casino and gambling industry to new heights. CHDN, with its strategic expansion initiatives, is well-positioned to leverage this trend and achieve significant growth. The company's financial performance and growth prospects also look promising.

However, given CHDN’s current high valuation, it may be prudent to monitor for a more advantageous entry point in the stock.

How Does Churchill Downs Incorporated (CHDN) Stack Up Against Its Peers?

Given the current uncertainty around CHDN's near-term prospects, its potential to outperform in the coming weeks and months may be less clear. However, there are other industry peers with much more impressive POWR Ratings.

So, consider these three A (Strong Buy) and B (Buy) rated stocks from the Entertainment - Casinos/Gambling industry: Super Group Limited (SGHC), Accel Entertainment, Inc. To explore more A & B-rated casino and gambling stocks, click here.

What To Do Next?

43 year investment veteran, Steve Reitmeister, has just released his 2024 market outlook along with trading plan and top 11 picks for the year ahead.

2024 Stock Market Outlook >

CHDN shares were unchanged in premarket trading Thursday. Year-to-date, CHDN has declined -1.85%, versus a 9.81% rise in the benchmark S&P 500 index during the same period.

Aanchal's passion for financial markets drives her work as an investment analyst and journalist. She earned her bachelor's degree in finance and is pursuing the CFA program. She is proficient at assessing the long-term prospects of stocks with her fundamental analysis skills. Her goal is to help investors build portfolios with sustainable returns.

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