Archives for July 2011

ALMOST HOPELESSLY BEAT

A question almost sure to elicit a difference of opinion among avid racing fans is this: Which single race would you select as the one in which a horse looked impossibly beaten, yet somehow got up to win? If you could have wagered on who would win when the horses reached the final strides, how sure would you have been as to the outcome?

My candidates are twofold: John Henry’s win in the 1981 Arlington Million over The Bart and Personal Ensign’s win in the 1988 Breeders’ Cup Distaff over Winning Colors. I watched the former on television and the latter in person.

Click here to watch John Henry and click here to watch Personal Ensign.

If forced to choose between these epic come-from-behind victories, I would select the John Henry race. Old John looked beat even a jump from the wire. In fact, to my eyes, John Henry looked like he lost the race.

WHAT DID YOU SAY JUST HAPPENED?

Some readers commented on this website and elsewhere online about last week’s post titled “How Well Managed is Churchill Downs, Inc.?” by conveying the view that CDI is pursuing advance deposit wagering and alternative gaming to the detriment of on-track racing. Following is my take on that understandable concern.

This week brought several news items that once would have seemed highly unlikely, if not preposterous.

First, the USA’s women’s soccer team played Japan in a German stadium in the title game of the World Cup. WWII veterans probably were most struck by the irony.

Second, a news report originating from Danang, Vietnam stated: “Three U. S. Navy ships were welcomed yesterday by former foe Vietnam for joint training, despite China’s irritation following weeks of fiery exchanges between the communist neighbors over disputed areas of the South China Sea.” Vietnam War veterans might have done a double take on hearing this one had it not been for the fact that the two former bitter enemies also conducted joint naval exercises last August. Onetime “Hanoi Hilton” POW and  retired Navy Captain John McCain–presently a member of the Senate Armed Services Committee–must be at least a little surprised at this turn of events.

Third, the giant bookstore chain Borders announced that it would liquidate because it could not find a buyer acceptable to its creditors. Bricks and mortar bookstores have long been an integral part of the American scene. Yet book browsing at Borders is soon to be gone with the wind, to recede into the past like spending lazy days at some once-crowded racetracks. Barnes & Noble will be the only national bookstore chain left in the United States. According to estimates by the Institute of Publishing Research, sales of traditional books are declining by 11.4% in 2011 whereas sales of e-books are growing by 111.1%.

Finally, a report said that investors were leery of Intel because the personal computers that use the company’s chips are rapidly  losing out to mobile devices like the iPhone and iPad.

Anyone over the age of 50 who resides in a developed nation in many ways might as well be an immigrant. The country may be the USA, or Great Britain, or wherever, but the modern era in that nation is dramatically different than the one he or she grew up in. Lots of the old rules and ways of living and doing business no longer apply. Some people adapt, while others never do and become prisoners of the past.

The inescapable lesson for those of us who are aficionados of horse racing as it once was is this: Regardless of how fervently traditional horse racing fans would prefer to bring back the halcyon days of the past, when fans spent leisurely sunsplashed days at the racetrack and bet with a real, live pari-mutuel clerk, we cannot, excepting at a few venerable throwbacks like Saratoga, Del Mar, and Keeneland. We can lament that racetracks have become part of casino companies and that online wagering is the wave of the future, but alas, lamenting it won’t change the facts of the situation, circa 2011, or move the industry forward.

We can cherish our memories of how racing used to be, while joining the younger generation of racing executives and fans to figure out how to move racing upward and onward in a new world where erstwhile battlefield enemies collaborate, books are increasingly sold online and read on digital devices, and pari-mutuel bettors instantaneously transmit their picks to racetracks around the globe.

A scaffold can be used for hangings but also as a platform for building something new. Racing can have a viable place in the ever-evolving business and leisure milieu of the 21st century.

Copyright © 2011 Horse Racing Business

HOW WELL MANAGED IS CHURCHILL DOWNS, INC.?

Like the upper management of all publicly traded companies, the top executives of Churchill Downs, Inc. (CDI) receive their share of criticism from a variety of sources. In the Internet age, anyone with access to a computer can have their say. The reality is that the facts paint a picture of a masterful job of shepherding CDI through turbulent times, the turbulence caused largely by a languid economy and a pari-mutuel industry in free fall.

The economic tsunami that has roiled the American economy has taken its toll on most companies, but firms operating in leisure industries–like gaming–that depend on discretionary spending have been especially vulnerable. Witness some of the problems at the big casino companies. Prominently, for example, Caesars Entertainment Corporation—the world’s largest—has close to a negative net worth.

CDI’s net revenues from its Racing Operations segment (four racetracks) fell by 7% from 2008 to 2009 and by 4% from 2009 to 2010. By contrast, the company’s net revenues from its On-Line Business segment increased by 33% in 2008-2009 and by 68% in 2009-2010. CDI’s net revenues from its Gaming segment grew by 18% in 2008-2009 and by 98% in 2009-2010.

These figures reflect the continuing decline in U. S. pari-mutuel wagering and CDI’s  expanding presence in advance deposit wagering and casino gaming. Most notably, the company acquired YouBet.com and Harlow’s Casino in Greenville, Mississippi.

When CDI’s return to shareholders is compared to returns from similar companies, CDI does well. In the five-year period 2005-2010, total returns (stock appreciation plus reinvestment of dividends) from holding CDI’s stock have generally been equal to or better than four peer indices (the Russell 2000 Index, the NASDAQ Market Index, Morningstar Gambling, and Hemscott Leisure). This is remarkable in view of the headwinds in the pari-mutuel industry and the legal constraints that have prohibited CDI from offering alternative gaming in two major  markets (Chicago and Louisville), where its racetracks are proximate to casinos. Not many companies could be precluded from extending their product line (gaming) in two prime markets, where there is fierce competition, and still do as well on key financial metrics as CDI.

CDI stock is presently trading at about 33 times its previous 12-months earnings. This is a lofty multiple for a mature non-high-tech company whose traditional core market is in decline. The stock may be overvalued or investors may be anticipating that the company’s strategic plan to diversify within the gaming/leisure industry will eventually produce much higher earnings.

Compared to the first quarter of 2010, CDI dramatically improved its financial performance in the first quarter of 2011 and should do much better still for the remainder of 2011; attendance and handle were some of the best ever for the Kentucky Derby and Kentucky Oaks and the Breeders’ Cup in November will be another boost.

The strategic accomplishment of CDI executives in recent years has largely been an untold story in the racing industry. Undoubtedly, some people will lament the decline of on-track pari-mutuel wagering at CDI and the growth of advance deposit wagering and gaming. Yet the fiduciary responsibility of the board of directors and management in publicly traded companies is shareholder wealth maximization and CDI strategy is consistent with that legal mandate.

(Full disclosure: The author does not currently own stock in Churchill Downs, Inc. and is not personally acquainted with upper management or members of the board of directors.)

Copyright © 2011 Horse Racing Business