CORONAVIRUS FEARS WHACK CHURCHILL DOWNS AND PENN NATIONAL GAMING VALUATIONS

Owing to fears over the coronavirus, events are being cancelled, hand sanitizers are scarce and selling for premium prices, and shock waves have roiled global stock and bond prices.  Today was called “Manic Monday,” as the major world stock markets plunged.

While the downdraft over the past couple of weeks took almost all stocks down, some were damaged far worse than average, including leisure and recreation stocks like those of cruise lines and casinos.  This is predictable in that people under threat of infection will avoid crowds and travel. 

The two publicly traded companies with the most racetracks are Churchill Downs, Inc. (CHDN) and Penn National Gaming (PENN).  Both have heavy involvement with regional casino businesses.

From the beginning of 2019 until the end of 2019, the Nasdaq composite gained 37% (adjusted for dividends and stock splits), whereas CHDN stock soared by 72% and PENN stock gained 40.4%.  With a buoyant economy heading into 2020 and consumers in a strong financial position, prospects for CHDN and PENN looked to be bright.  That is, until the “black swan” named coronavirus emerged in late February.

On February 20, 2020, the Nasdaq composite stood at 9817.18.  CHDN was at $163.44 and PENN was at $38.28.  At this writing on “Manic Monday,” March 9, 2020, the Nasdaq composite has fallen by 18% from its price on February 20.  In contrast, CHDN has plunged by 35% and PENN by 45%.

The view here is that second quarter GDP will take a significant hit from the coronavirus scare, perhaps on the order of a half percentage point decline.  However, history tells us that a downturn from an epidemic is likely to be short-lived and that the economy and stock prices will soon recover.  In retrospect, this will look like a blip and a buying opportunity for stocks of strong companies.

As people return to normal lives, casino and racetrack attendance will inevitably come back.  The danger for CHDN in the short term is that the Kentucky Derby might have to be cancelled or postponed.  Since it is about two months away, the probability of cancellation or postponement is likely in the neighborhood of 10-12%.

(Full Disclosure:  I am a CHDN shareholder.)

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