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Bull of the Day: Churchill Downs (CHDN)

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People like to gamble.

Though the legal wagering industry in the US has been hindered by a host of moral and ethical concerns and an inconsistent patchwork of regulations, the tide is clearly turning, and there has been a significant expansion of legitimate options for placing wagers.

Almost everyone is familiar with the Churchill Downs Incorporated (CHDN - Free Report) as the home of one of the most popular and profitable sporting events in the world – the Kentucky Derby Horse race. Tens of millions of people tune into the “Run for the Roses” each May. It’s so famous that simply watching on TV – whether or not you choose to wear a fancy hat – is basically a rite of passage.

What’s less recognized is that in addition to the most famous track in the world, the CHDN company owns and operates four other tracks, six casinos, numerous OTB facilities in which horse racing fans can bet on far away races, and – most importantly – TwinSpires.com, the biggest online wagering business in the US.

Churchill Downs has been coy so far about their plans for expanding online wagering, and with good reason, it wouldn’t make sense to advertise that you’re the leader in activity that remains in a moral and legal grey area.

If the regulations regarding betting on sports become clearer, it’s easy to envision Churchill Downs’ revenues from technology and infrastructure they’ve already developed – but can finally deploy on a serious scale – will explode.

SCOTUS Decision

In May of 2018, the Supreme Court decided 6-3 that the regulation of sports gambling should be left up to individual states, significantly reducing the hurdles that an inconsistent patchwork of laws had placed in the way of legal sports wagering in most jurisdictions.

The case that the court decided was a challenge to a 1992 federal law that disallowed most states from permitting legal sports betting. The Professional and Amateur Sports Protection Act (PASPA) prohibited states from establishing or allowing betting on sporting events, but allowed for “grandfather” provisions that allowed four states to continue licensing and taxing sports gambling operations – most notably Nevada which has been allowing sports betting since the 1940s.

Though it’s impossible to exactly quantify the amount Americans are betting illegally on sports, the most accurate estimates are that something in the area of $150 billion is wagered each year on professional sports and high-level amateur competitions - like the NCAA tournament.

As tends to be the case when any (previously restricted) activity goes mainstream, there are a wide range of options for consumers. In keeping with the tradition of their iconic namesake facility, Churchill Downs has chosen to address the high end of the market.

Their state-of-the-art Derby City casino, opened in the Fall of 2018, is Louisville’s only legal gaming facility and features 900 gambling machines in 70 different themes as well as two locally-inspired restaurants and a vast gaming bar and outdoor patio, all spread over 85,000 square feet.

Derby City is only one of Churchill Downs’ physical facilities, but it’s an important testament to the company’s strategy. In an environment that is bound to include an increasing amount of options for gaming customers, CHDN has correctly surmised that those customers don’t simply want to make bets; they also want an all-inclusive entertainment experience that includes dining, music and other amenities.

Twin Spires

Named after the distinctive architectural profile of the racetrack itself, TwinSpires.com is Churchill Downs’ online portal for wagering. Offering gamblers the opportunity to watch high-resolution live video from five tracks, up-to-the-minute odds, handicapping data and access to all sorts of wagers – from the traditional “win-place-show” tickets as well as a wide array of more exotic bets.

It’s a quick and efficient interface that Churchill Downs describes as like “having your own OTB.” Even more importantly, it’s a foothold in what is likely to be the future of online gaming. There will probably always be some demand for physical racetracks or casinos for gamblers to visit in person, but the economies of scale afforded by internet gambling will someday massively eclipse the in-person wagering business.

Churchill Downs is already positioned to expand as much as the (constantly evolving) laws allow.

The Financials

The beauty of Churchill Downs right now is that their existing businesses are popular and profitable. The potential for the expansion of sports betting to wider online audiences is basically a free call option.  

The Zacks Consensus Estimate for 2019 net earnings has risen from $3.88 to $4.40/share in the past 60 days, earning CHDN a Zacks Rank #1 (Strong Buy).

It’s somewhat of a rare treat to be able to own a combination of a solidly profitable business that also has tremendous growth potential. If you’re bullish on the gaming industry, going long on Churchill Downs is an easy bet to make.

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