HRM Projects In Kentucky And Virginia Will Improve Fan Experience

Key Takeaways

• Investments in HRM properties and technology are expected to drive revenue growth and enhance earnings through improved customer engagement and gaming revenue.
  
• Strategic capital allocation amidst economic uncertainties is poised to improve net margins through efficient spending and optimized development plans.
  
• Economic uncertainty and inflation risks impact costs, capex, and future revenue, with consumer softness and competition affecting margins and growth initiatives.

Catalysts

Operates live and historical racing entertainment venues, online wagering businesses, and regional casino gaming properties in the United States.

• Churchill Downs is actively investing in its HRM (Historical Racing Machines) properties in Kentucky and Virginia, which are expected to drive future revenue growth and enhance earnings through increased customer engagement and higher gaming revenue.
  
• The completion of the new starting gate pavilion project at Churchill Downs Racetrack, along with improvements in amenities, is likely to boost future ticket revenue and net margins by offering enhanced customer experiences during the Kentucky Derby.
  
• Continued development in HRM venues, such as the Roseshire Gaming Parlor in Henrico County and Marshall Yards HRM venue in Kentucky, is anticipated to expand the company’s footprint and increase revenue and EBITDA profitability in upcoming years.
  
• The acquisition and optimization of Exacta technology will allow cost reductions and performance improvements at HRM venues, positively impacting earnings through enhanced technology fees and gaming floor optimization.
  
• Strategic pause on the $900 million project at Churchill Downs due to economic uncertainties could lead to more efficient future capital allocation, potentially improving net profit margins once the macro environment stabilizes and allows a resumption with better cost certainty.

Churchill Downs Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Churchill Downs's revenue will grow by 5.3% annually over the next 3 years.
• Analysts assume that profit margins will increase from 15.1% today to 18.7% in 3 years time.
• Analysts expect earnings to reach $607.2 million (and earnings per share of $8.15) by about April 2028, up from $421.9 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 20.2x on those 2028 earnings, up from 15.7x today. This future PE is lower than the current PE for the US Hospitality industry at 22.6x.
• Analysts expect the number of shares outstanding to decline by 1.73% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.62%, as per the Simply Wall St company report.

Churchill Downs Future Earnings Per Share Growth

Risks

• Increased economic uncertainty and risk of significant inflation due to new tariffs might lead to higher costs for construction materials, impacting project budgets and potentially affecting capital expenditure plans and future revenue growth.
  
• Hesitancy and consumer softness observed at the lower tier of customers could impact unrated play revenue, particularly in gaming segments, which might affect net margins in regional gaming properties.
  
• Competition and external factors such as weather events have led to decreased adjusted EBITDA in certain segments, particularly affecting HRM properties in Virginia, which could strain overall earnings.
  
• The temporary pause in the $900 million multiyear project at Churchill Downs Racetrack due to macroeconomic concerns may hinder future revenue growth and affect the long-term strategy for enhancing key events like the Kentucky Derby.
  
• Ongoing economic uncertainties and fluctuations might impact the pipeline of growth initiatives and capex projects, potentially affecting revenue and adjusted EBITDA projections in different business segments.

Valuation

• The analysts have a consensus price target of $136.858 for Churchill Downs based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $156.0, and the most bearish reporting a price target of just $115.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $3.3 billion, earnings will come to $607.2 million, and it would be trading on a PE ratio of 20.2x, assuming you use a discount rate of 9.6%.
  
• Given the current share price of $91.42, the analyst price target of $136.86 is 33.2% 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.