Analyst Predicts Favorable Winds for Churchill Downs' Shareholdings
Churchill Downs' (NASDAQ: CHDN) shares have only dropped by a third this year, making it one of the better performances among gaming stocks. Stifel analyst Jeffrey Stantial believes there's potential for a turnaround. In a note to clients, he called Churchill Downs a "catalyst-rich" story with deleveraging as one of the triggers. He maintained a "buy" rating on the stock with a $153 price target, which indicates a 13.7% upside from the June 7 closing price.
The company had a successful Kentucky Derby and Derby Week, setting records for handle. Stantial also pointed out the extended broadcast arrangement with NBC Sports and the growing viewership (+13% Y/Y) as well as their targeted sponsorship strategy. The positive feedback on the debuted Paddock project is another reason for optimism.
TwinSpires, Churchill Downs' online betting arm, saw a handle of $92.1 million during the Kentucky Derby, outperforming the previous record of $75.5 million set the year before.
Churchill Downs' Stock Hinges on Kentucky and Virginia
Despite sluggish numbers for Derby City Gaming, Kentucky and Virginia are crucial to the company's overall narrative. Churchill Downs' historical horseracing (HHR) facilities in Virginia, operating under the Rosies brand, have been thriving. All but one of these properties saw double-digit year-over-year increases in gross gaming revenue (GGR). The recent ban on skill games in Virginia is a bonus for the operator in the state.
The governor's veto of a bill that would legalize skill games again is significant, but the chances of reaching an agreement are high, with a higher tax rate and geographic exclusion zones around casino/HHR locations as the main sticking points, according to Stantial. The potential casino project in Petersburg is another area of interest for investors. However, it has faced opposition from unions and competitors.
Despite the rocky beginning for Derby City Gaming, management confirmed to Stantial that overall same-store sales trends in Kentucky remain solid.
Exacta Deal Bringing Benefits
Churchill Downs' shares could also gain from their strategic acquisitions, like the $250 million deal for Exacta Systems in December 2022. The Florida-based company specializes in providing HHR systems and gaming machines. This acquisition boosted Churchill's HHR exposure in their home state, Virginia, and New Hampshire, contributing to growth.
The plan is to convert about 10% of Kentucky's floors to Exacta, and Stantial estimates at least $15 million in annual cost savings in Virginia thanks to healthy same-store growth and the rollout of 'The Rose'. The international HHR market and Exacta's role in it are another opportunity for the company, according to management.
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