Churchill Downs Stock: Undiscovered Jewel (NASDAQ:CHDN)

Thesis

Churchill Downs (NASDAQ:CHDN) is a kind of undiscovered gems that has been producing fabulous returns for a really very long time, however most traders have by no means heard of it.

Which is a disgrace as a result of this is without doubt one of the greatest shares of the final decade. Everything they do is designed to ship shareholder returns and this stock actually wants extra consideration. In Q1 2023, they delivered one other improbable quarter and it seems just like the outcomes are a harbinger of FY2023 outcomes as their acquisitions actually repay.

Analysis

This stock has been a 10-bagger over the previous decade and reveals no signal of slowing down, with superb Q1 outcomes.

• Net income Q1: 559,5m vs. 364,1m in 2022
• Net revenue Q1: 155,7m vs. 42,1m in 2022

Revenue rose 53.7% YoY for an organization with a P/E of solely 22. Most firms with such YoY figures have a lot larger P/E ratios.

Net revenue obtained a pleasant enhance from the sale of Arlington at the start of the 12 months, which contributed 86.2 million. Excluding this sale, internet revenue would have been barely larger than final 12 months at 69.5 million.

• Live and historic racing income elevated 194% vs. Q1 2022
• Twin-spots income elevated 22% vs. Q1 2022
• Gaming income elevated by 42% vs. Q1 2022

The majority of this enhance will be attributed to the P2E acquisition, which contributed 97.7 million, and the Turfway opening in North Kentucky, which contributed 15.6 million.

Future Growth Opportunities

The optimistic affect of those acquisitions might be felt in every quarter of 2023. And administration plans to spend money on additional development. One of the principle focuses might be on increasing the HRM enterprise over the subsequent 5 to 10 years. This is a high-margin, high-growth enterprise providing glorious returns on invested capital.

In addition, Derby City Gaming will open in This autumn 2023 and Rosies Emporia HRM will open in Q3 2023. There may even be 1,100 new HRMs and 100 resort rooms at Dumfries HRM in Q2 2024. As one can see, Churchill Downs is really investing in future development and taking a long-term method.

• ROC: 5-year common is 26.13%
• ROE: 5-year common is 38.14%

As evidenced by their fabulous return on capital and return on equity figures over the past 5 years, they use their capital effectively and each new acquisition and enlargement provides worth.

And administration acknowledged within the Q1 earnings name that they consider the P2E belongings are at an early stage and much from mature, so shareholders can anticipate extra development sooner or later. Furthermore, there may be the potential for 9 retail sports activities betting places in Kentucky, which might enhance site visitors, and Kentucky has banned so-called grey video games and this regulation will come into play in direction of the tip of the summer time of 2023. This must also profit Churchill Downs.

With Q1 FCF of 204m and money of 173m and long-term debt of 1,872 and internet leverage of three.9x, Churchill Downs doesn’t have the perfect stability sheet. But it’s nonetheless one of many extra conservative stability sheets within the on line casino trade once we have a look at a few of its friends. And additionally administration’s steerage for internet leverage enhancements in 2024 and 2025 as the continuing investments begin to repay.

Looking on the P/E ratio, we’ve got an organization that’s more likely to develop its FY23 revenues by 40-50% and has a P/E ratio within the low 20s. This is just not costly for such a top quality compounder with such development alternatives.

Furthermore, Churchill Downs has improved its internet revenue margins because the COVID lows to a powerful 27% and is more likely to return to the 30%+ vary sooner or later. These are A+ internet revenue margins in any trade.

Competitive Advantages

Churchill Downs has a deep moat with the Kentucky Derby, which turns 150 subsequent 12 months. A legacy like that’s virtually inconceivable to duplicate.

In addition, their enterprise is protected by the licenses and rules required to function within the gaming and on line casino trade. The obstacles to entry are excessive and Churchill Downs in all probability has a great foyer to make it even tougher for potential opponents.

In the long term, they are going to in all probability be included within the S&P 500 within the subsequent few years in the event that they develop as they’ve. This might act as a catalyst, because the S&P ETFs must purchase the stock. But even with out this, the pursuits of shareholders are consistent with the pursuits of administration, and this must also have an effect on shareholder worth.

The foundation of the reverse DCF is the TTM EPS of $14.54 that we get if we take $4.09 from Q1. This tells us that EPS solely must develop by 9% over 10 years to justify the share worth. In distinction, the 5-year common EPS development was 33.93%. This leads me to conclude that the share worth is undervalued relative to potential future development charges.

Conclusion

As I discussed in my final article on Churchill Downs, which you’ll learn right here, this stock is a purchase and one among my prime convictions. The final quarter was fabulous and the subsequent ones will in all probability be simply pretty much as good.

This firm has every little thing an investor might need: a excessive return on capital and greater than sufficient development alternatives by means of natural development and acquisitions to capitalize on it. In addition, the administration group could be very shareholder-friendly and has pores and skin within the recreation.

If future returns on capital are consistent with previous returns on capital, this might imply an annual return of greater than 20% over the subsequent 5 to 10 years, as there is no such thing as a signal of income stopping. Everything administration does is for the long run and for the shareholders.