CHURCHILL DOWNS PERFORMANCE REVIEW

Churchill Downs, Inc. (CDI) has several related lines of business: racetracks (Churchill Downs, Arlington Park, Calder Race Course, Fairgrounds Race Course, and 5% of Kentucky Downs); off-track betting facilities in Kentucky, Illinois, and Louisiana; online businesses (TwinSpires advance deposit wagering and Bloodstock Research data services); 50% of HRTV, a television channel; gaming (Calder Casino, Fair Grounds Slots, and Video Services video poker machines); and assorted other investments like a new entertainment subsidiary and a simulcast production company.

In addition, CDI is trying to acquire YouBet.com, an advance deposit wagering firm, but has encountered resistance. Following is an excerpt from the CDI 2009 10K:

“On November 17, 2009, a putative class action lawsuit, Wayne Witkowski v. Youbet.com, Inc., et al., was filed in the Superior Court of Los Angeles, California against Youbet, various of its directors, the Company and the Company’s wholly-owned subsidiaries, Tomahawk Merger Corp. (‘Merger Sub’) and Tomahawk Merger LLC (‘Merger LLC’). Subsequently, five additional lawsuits were also filed in the Los Angeles Superior Court, two of which name Youbet and its directors as defendants and three of which also name the Company as a defendant. All six lawsuits, which we refer to collectively as the Los Angeles litigation, are putative class actions brought on behalf of Youbet’s stockholders. Plaintiffs in the Los Angeles litigation have since moved to consolidate the Los Angeles litigation, to file a single consolidated complaint and to appoint lead counsel. That motion was granted on January 22, 2010.

The complaints in the Los Angeles litigation all allege that Youbet’s directors have breached their fiduciary duties, including alleged duties of loyalty, due care and candor, in connection with the proposed merger transaction.”

Total CDI handle was $2.7 billion in 2009, $2.9 billion in 2008, and $3.2 billion in 2007. This decline is consistent with the decreases experienced by other gambling companies during the recession.

For the year ended December 31, 2009 (the most recent financial results available), CDI reported net revenue of nearly $440 million; net earnings of $16.8 million, and diluted earnings per share of $1.21. It continued to maintain a per-share dividend of 50 cents. Net revenue increased by 2.2% from 2008 to 2009. Net earnings fell by 41% from 2008 to 2009 but this is an aberration because 2008 net earnings included $17.2 million from insurance recoveries stemming from damage caused by Hurricane Katrina. If 2008 net earnings are adjusted for the $17.2 million and then compared to 2009 net earnings, 2009 net earnings increased by 47% from 2008.

The CDI SEC 10K filing for 2009 states: “Our total net revenues increased $9.1 million primarily as a result of increased wagering through the Online Business and the full year’s effect of gaming revenues from the slot operations at Fair Grounds, which opened its permanent facility during November 2008. These increases were partially offset by declines in racetrack pari-mutuel revenues and other operating revenues derived from corporate hospitality and admissions revenues generated by Kentucky Derby week. In addition, Racing Operations conducted nine fewer live race days in 2009 compared to 2008. ”

In January 2010, CDI launched Calder Casino next to Calder Race Course with 1,200-plus slot machines in a 104,000 square-foot facility that also has three dining operations. This is part of the diversification initiative that CDI began in 2007. Because of a downward trend in pari-mutuel wagering in the United States, top management is attempting to compensate by venturing into non-pari-mutuel lines of business, such as the slots facilities and the new entertainment subsidiary.

At the conclusion of 2009, CDI had a debt-to-equity ratio of .78 and 44% of the company was financed with debt. One area of concern is that the current ratio (current assets/current liabilities) was a weak .57, meaning that CDI may be slow in meeting its current obligations to creditors.

CDI has been unable to install slots at its flagship racetrack in Louisville, Kentucky, owing to the lack of facilitating legislation in the Kentucky legislature. The governor would sign such legislation if it were to reach his desk. However, based on a contentious situation in the Kentucky Senate, that does not look promising in the foreseeable future. Moreover, Instant Racing (previously run races presented on a slots-like machine) legislation is defunct in the current term of the Kentucky legislature, although there is the possibility that the governor has the power to authorize Instant Racing under Kentucky’s existing pari-mutuel law and will exercise it.

During the past 52 weeks, CDI stock (listed on Nasdaq under the symbol CHDN) has traded in the range of $28.20-$40.68. It closed on March 26, 2010, at $37.74 per share with a 31.74-to-1 price-to-earnings ratio. This is a hefty premium to gambling stocks in general, which trade at an average price-to-earnings multiple of about 17-to-1. The short interest on CDI has been decreasing, which is a favorable sign in terms of the likely direction of the stock.

The outlook for CDI should improve along with the U. S. economy; CDI’s performance will move inversely with the unemployment rate in the United States. The stagnation in pari-mutuel handle should be offset and then some by the company’s alternative gaming operations. Even if the YouBet.com acquisition were to fall through, CDI still looks poised for growth in revenues and profits. Whether these prospects are worth the premium price-to-earnings ratio is the issue that each investor must evaluate.

Bill Shanklin is not currently a shareholder in Churchill Downs, Inc.

Copyright © 2010 Horse Racing Business

Comments

  1. Bill:

    I’m not the sharpest knife in the drawer about this stuff, that’s why I read your blog. But it seems to me if Churchill is operating in debt and already have an internet wagering service, why would they want to acquire a dogged company like youbet? Seems to me that trying to compete with a behemoth company like the one that owns TVG, isn’t wise in this climate where handles are down and don’t look to improve any time soon.

    Thanks for your blog

  2. Ratherrapid says

    “Our net revenues increased 9.1% primarily as a result of increased wagering from On Line business…”

    My question is why are other (all tracks) failing to form their own ADWs–and that would be in particular for such threatened tracks as Fairmount and River Downs, and WHY is Twin Spires Et. Al. confining its online advertising mostly to horse related sites instead of taking out full blown video adds on ESPN and the like, etc. If our industry business problem is “revenue” why is there such a lag in pursuing the obvious, which is on line wagering?

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