IS CHURCHILL DOWNS, INC. AN OVERVALUED HEDGE FUND?

Churchill Downs, Inc. (CDI) is a key player in retail horse racing, especially because of its ownership of the American sport’s crown jewel, the Kentucky Derby.  Howard Klein, a perceptive and respected gaming/leisure analyst and publisher of the casino investment site The House Edge evaluated CDI for Seeking Alpha on June 27, 2018.  In that report, he compared CDI to Las Vegas Sands as an investment opportunity.  He said about CDI:  “To properly value the stock, you need to see it not as a gaming operator but as something of an iconic racetrack event linked to an internal hedge fund.”

Klein is candid:

“Readers…have long known that I have never been a fan of the stock of Churchill Downs, Inc.  To be precise I am not fan of the stock, but generally like the company.  CDI is a solid, decently run, diverse entrant in the gaming sector.  Better than some, less so than others… My concern in past posts as well as in this one is my continuing puzzlement that given the asset base, performance, and forward potential, the stock trades at around $300 a share.”

Klein cites familiar metrics and trends to explain his reasoning for stating that CDI stock is overvalued:

CDI’s racetrack “segment produced $276m in revenue, or approximately 31% of total 2017 revenue. The iconic Kentucky Derby is a superb event with a great history, but it alone cannot reverse the negative demographic trend of live racing attendance and handle declines going on for decades now.  Firstly, the average age of a racetrack bettor is 51 years.  And according to a Jockey Club study, the industry is losing 2% of its fans a year to the glum actuarial realities.”

Klein’s most intriguing and thought-provoking narrative concerns CDI’s sale of its Big Fish subsidiary for $990 million in December 2017, ostensibly so CDI could focus on core assets in racing and casinos.  He referred to the sale as “sudden” and “shocking” to some followers of CDI.  According to Klein’s unnamed sources, the main motive for the sale was to raise cash to buy back stock, reportedly because “CDI had caught wind of an activist investor who had acquired somewhat less than 5% of its stock with the strategy of instituting a battle for control and, upon a win, unload the crown jewel asset, Churchill Downs and the Kentucky Derby event, for an estimated $2b.”

CDI is not the kind of situation an activist would typically target in that the company has produced outstanding returns for its shareholders, with its stock price soaring by nearly 65% in the past year.  Only if the stock price faltered badly would activists be enticed to buy more stock and demand one or more seats on the board of directors, and perhaps even control (about 75% of CDI stock is owned by institutions).

In closing, the view here is that because CDI’s businesses are confined to gambling-centric entertainment, the company does not at all resemble how a hedge fund operates.  Klein makes a persuasive case that CDI stock is overvalued, but so is the entire stock market if the Shiller historical P/E ratio is the benchmark.

Copyright © 2018 Horse Racing Business

A POTENTIAL PROBLEM WITH SPORTS BETTING FOR CASINOS AND RACETRACKS

A number of states will ultimately legalize sports betting following the U. S. Supreme Court decision that lifted the ban and some already have.  Casinos and racetracks in such states will have an issue to cope with that they did not have when their product line was limited to slot machines, table games, and pari-mutuel wagering.

In sports betting, a casino attempts to balance the money bet on each team by adjusting the odds.  That way, the casino makes money on its takeout.  However, if too much money is bet on one team, the casino stands to lose should bets on that team need to be paid off.  Particularly vulnerable are casinos located near a team or teams that local fans are likely to open their wallets to bet on.

The Wall Street Journal recently (June 7, 2018) wrote about the liabilities casinos can face and provided an actual example pertaining to Las Vegas’ first professional sports team:

“Enthusiastic local fans kept betting—and mostly winning—on the Las Vegas Golden Knights of the National Hockey League, hurting Nevada sportsbook operators.  In a playoff game last month, a late goal by the Golden Knights reversed the fortunes of Nevada bookmakers including William Hill U. S.  The betting operator went from recording a slight loss on the game to a huge one, a swing of over $100,000.  Events like that one offer a glimpse into the challenges betting firms are likely to face around the country.”

In the playoff run by the Las Vegas Golden Knights, 70% of the money wagered with William Hill was bet on the Golden Knights.  During the regular season, the figure was 90%.

The Journal reported that each state must operate as its own betting market because, at the present time, there is no legal basis for states to spread risks on a national basis.  Bookmakers will have to seek legislation on interstate compacts like those currently in place for horse racing and state lotteries.

One could see casinos, for instance, in Philadelphia inundated with bets on provincial fan favorites like the Eagles and Villanova Wildcats and at the other end of Pennsylvania the Pittsburgh casinos could be swamped by bets on the always-contending Steelers and Penguins.  This scenario will likely be played out all over the country in states with sports betting.  Just wait until the Oakland Raiders move to Las Vegas and watch the money plunked down by many people betting more on emotion than reason.

The Journal commented that if casinos make it unattractive for bettors to support the home team via manipulation of odds, the beneficiaries are likely to be illegal bookmakers, who already have the advantage of offering a means to evade taxes on earnings.

From growing up in Kentucky, where basketball is a passion bordering on a mania, I am certain that nearby casinos should expect an avalanche of emotion-fueled bets whenever the University of Kentucky and the University of Louisville teams are part of March Madness.  Same for when the Ohio State Buckeyes are on the gridiron.

Copyright © 2018 Horse Racing Business

THANKFUL FOR AN ENGLISH LEGACY ON AMERICAN INDEPENDENCE DAY

Republished annually in celebration of July 4, 1776

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The town of Newmarket in Suffolk, England dates back to 1200.  It rightfully bills itself as “the town where horseracing, the ‘sport of kings,’ was born some three and a half centuries ago and from where it was exported around the world.”

Charles II was the original “king” in the “sport of kings.”  The Newmarket Racecourses website provides some history about the origins of horse racing as we know it:

“It was Charles II who did more than any other monarch to advance the sport of horseracing in this country–he instituted by Act of Parliament in 1665 the first race to be run in Britain under written rules and exported the name of Newmarket and the sport of horseracing to America that same year–and his love affair with Newmarket (not to mention with his mistress in the town, Nell Gwyn!) is well chronicled.”

The sport exported by Charles II took root in colonial America and had fans among historic giants like George Washington, Thomas Jefferson, James Madison, and James Monroe.  On July 4, 1776, these men and others launched the only revolution fomented by the upper classes.

On this Independence Day, we Americans are grateful that the Founding Fathers had the courage to break with Mother England.  But, speaking for myself at least, I am also grateful that one of the vast number of English customs and pastimes that continued on after the Revolution–and goes on today–was horse racing.

Wishing you a glorious 4th of July.

Copyright © 2018 Horse Racing Business