Expanding Entertainment And Racing Ventures Will Drive New Revenue Heights Across Kentucky And Virginia

Key Takeaways

• Investment in HRM properties and new racing events is set to boost revenue, leveraging high-margin gaming and increased attendance.
  
• Expanded seating and optimized operations enhance customer experience and drive sustainable growth in net margins and free cash flow.
  
• Expansion projects and new developments face risks from cost overruns, competition, market acceptance, and regulatory approvals, potentially impacting margins and future revenue.

Catalysts

Operates as a racing, online wagering, and gaming entertainment company in the United States.

• Expansion of seating and hospitality options at the Kentucky Derby, including premium seats and improved amenities, is expected to enhance revenue by attracting more high-paying customers.
  
• Significant investment in HRM (Historical Racing Machines) properties in Virginia and Kentucky is projected to drive revenue growth and improve earnings, leveraging high-margin gaming activities.
  
• Anticipation of improved customer experience and increased capacity with the new HRM entertainment venues in Kentucky and Virginia could enhance overall revenue and net margins.
  
• Introduction of significant racing events, such as a Kentucky Derby qualifying race in Virginia, may boost revenue by increasing attendance and wagering, thus strengthening net earnings.
  
• Continuous optimization of HRM operations, including cost reduction and efficiency improvements, is likely to support sustainable growth in adjusted EBITDA and free cash flow over the long term.

Churchill Downs Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Churchill Downs's revenue will grow by 6.0% annually over the next 3 years.
• Analysts assume that profit margins will increase from 15.4% today to 20.7% in 3 years time.
• Analysts expect earnings to reach $657.6 million (and earnings per share of $8.83) by about November 2027, up from $410.9 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 23.4x on those 2027 earnings, down from 24.8x today. This future PE is lower than the current PE for the US Hospitality industry at 24.4x.
• Analysts expect the number of shares outstanding to grow by 0.44% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.49%, as per the Simply Wall St company report.

Churchill Downs Future Earnings Per Share Growth

Risks

• The expansion projects at the Kentucky Derby racetrack and the HRM venues in Virginia and Kentucky involve significant capital expenditure. Any cost overruns or delays could negatively impact net margins and earnings.
  
• The company faces risks from increased competition around a few regional gaming properties, which could put pressure on revenue and margins.
  
• The success of new projects like the HRM property in Dumfries heavily depends on market acceptance and operational execution, presenting a risk to future revenue projections.
  
• Changes in regional gaming consumer behavior showing lower unrated play might affect revenue consistency, impacting earnings negatively.
  
• The dependency on regulatory support and approvals for future expansions, such as additional HRM machines in Virginia, presents a risk to growth, potentially impacting long-term revenue and profitability.

Valuation

• The analysts have a consensus price target of $163.02 for Churchill Downs based on their expectations of its future earnings growth, profit margins and other risk factors.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $3.2 billion, earnings will come to $657.6 million, and it would be trading on a PE ratio of 23.4x, assuming you use a discount rate of 8.5%.
• Given the current share price of $138.74, the analyst's price target of $163.02 is 14.9% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.