Racetrack Innovations And HRM Expansion Set To Sprint Ahead In Revenue Growth

Key Takeaways

• Expansion projects and growing wagering activities at Churchill Downs Racetrack indicate strong potential for increased revenue from ticket sales, sponsorships, and betting.
  
• Strategic expansion of Historical Racing Machines and acquisition of Exacta Systems' technology are expected to significantly enhance revenue and margins.
  
• Diversified risks including significant capital investment strain, execution risk in HRM venues, increased competition, and regulatory changes may impact profitability and growth.

Catalysts

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

• Expansion and renovation projects around the Churchill Downs Racetrack, including the Paddock Project and the Grandstand Club and Pavilion project, are expected to drive significant increases in ticketing revenue, personal seat licenses (PSL) inventory, and sponsorships, which should positively impact revenue growth.
  
• Growing wagering activities, especially with record-setting Derby Week betting, indicate potential for sustained growth in para-mutual wagering revenues.
  
• Introduction and expansion of High-Growth, High-Margin Historical Racing Machines (HRMs) in strategic locations within Kentucky, Virginia, and New Hampshire are anticipated to drive revenue and margin expansion with a beneficial return on capital.
  
• The acquisition of Exacta Systems' technology for HRMs presents opportunities for both top-line growth and margin improvement through vertical integration, optimization of gaming floors, and reduction in technology fees.
  
• Expansion into Business-to-Business (B2B) services with TwinSpires and United Tote, offering technology and para-mutual services to other platforms, introduces a new revenue stream and potential growth avenue, especially with successful application during the Kentucky Derby.

Assumptions

• Analysts are assuming Churchill Downs's revenue will grow by 9.0% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 15.6% today to 0.2% in 3 years time.
• Analysts expect earnings to reach $656.1 million (and earnings per share of $8.21) by about August 2027, up from $407.5 million today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as $549.8 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 21.5x on those 2027 earnings, down from 24.9x today. This future PE is greater than the current PE for the US Hospitality industry at 19.7x.
• Analysts expect the number of shares outstanding to decline by 1.94% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 8.16%, as per the Simply Wall St company report.

Risks

• The reliance on significant capital investments in projects like the Grandstand Club and Pavilion could strain cash flows if these projects do not achieve the anticipated payback within the targeted timeline, impacting net margins and free cash flow.
  
• Execution risks associated with the opening of new HRM venues on time and on budget in Kentucky, Virginia, and New Hampshire could delay expected revenue streams and affect profitability.
  
• The potential for increased competition in the HRM and gaming market, especially with the emergence of new types of skill games attempting to skirt recent bans, might lead to market saturation or reduced market share, impacting revenue growth.
  
• Regulatory risks and changes in gaming laws could impact the company's HRM expansion strategy and operation of HRM machines, affecting revenue and earnings.
  
• The need to continually invest in technology and innovation to maintain competitive advantage and comply with regulatory requirements could increase operational costs, impacting net margins and earnings.
  

Valuation

• The analysts have a consensus price target of $161.5 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 $3.4 billion, earnings will come to $656.1 million, and it would be trading on a PE ratio of 21.5x, assuming you use a discount rate of 8.2%.
  
• Given the current share price of $138.24, the analyst's price target of $161.5 is 14.4% 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.