Is Churchill Downs Stock A Buy?

The shares of Churchill Downs (NASDAQ: CHDN) are currently trading at 40% above pre-Covid levels observed in February 2020. The legalization of sports betting and iGaming wagering in the country along with the rising popularity of online applications during lockdowns have been key to the monumental growth in sports betting stocks. However, Churchill Downs has a considerably higher share of horse racing wagers instead of the sports and iGaming handle. Per Q2 2021 filings, the company’s TwinSpires platform generated 93% of revenues from online horse racing. Thus, Trefis believes that the stock is a risky pick to realize further gains. Our interactive dashboard analysis highlights Churchill Downs During 2008 Recession vs. Now.

Timeline of 2020 Crisis So Far:

• 12/12/2019: Coronavirus cases first reported in China
• 1/31/2020: WHO declares a global health emergency.
• 2/19/2020: Signs of effective containment in China and hopes of monetary easing by major central banks helps S&P 500 reach a record high
• 3/23/2020: S&P 500 drops 34% from the peak level seen on Feb 19, 2020, as COVID-19 cases accelerate outside China. Doesn’t help that oil prices crash in mid-March amid Saudi-led price war
• From 3/24/2020: S&P 500 recovers 94% from the lows seen on Mar 23, 2020, with the Fed’s multi-billion dollar stimulus package keeping the economy afloat during the prolonged lockdown and the vaccination drive allowing things to gradually return to near-normal conditions despite several waves of Covid infections.

In contrast, here’s how CHDN and the broader market performed during the 2007/2008 crisis. (related: Boyd Gaming During 2008 Recession vs. Now)

Timeline of 2007-08 Crisis

• 10/1/2007: Approximate pre-crisis peak in S&P 500 index
• 9/1/2008 – 10/1/2008: Accelerated market decline corresponding to Lehman bankruptcy filing (9/15/08)
• 3/1/2009: Approximate bottoming out of S&P 500 index
• 12/31/2009: Initial recovery to levels before accelerated decline (around 9/1/2008)

Churchill Downs Stock vs S&P 500 Performance Over 2007-08 Financial Crisis

CHDN stock declined from levels of around $17.50 in October 2007 (pre-crisis peak) to levels of around $10 in March 2009 (as the markets bottomed out), implying CHDN stock lost 43% from its approximate pre-crisis peak. It recovered post the 2008 crisis to levels of about $12.50 in early 2010 – rising by 24% between March 2009 and January 2010. In comparison, the S&P 500 Index first fell 51% in the wake of the recession before recovering 48% by January 2010.

Horse racing wagers have been key to top line recovery in 2021

Assisted by horse racing and a couple of acquisitions, Churchill Downs’ revenues increased by 50% from $882 million in 2017 to $1.3 billion in 2019. However, the net margins deteriorated from 16% to 10% over the period as rising debt resulted in higher interest expenses. In 2020, the company’s top line observed a 20% (y-o-y) contraction leading to a net loss of $82 million. Interestingly, the company reported $839 million of total revenues in H1 2021, 13% higher than $743 million reported in H1 2019. (related: we compare the revenue trends of Wynn Resorts and Draft Kings in, Is Wynn Resorts Stock A Better Bet Over Draft Kings?)

CONCLUSION

Phases of Covid-19 crisis:

• Early- to mid-March 2020: Fear of the coronavirus outbreak spreading rapidly translates into reality, with the number of cases accelerating globally
• Late-March 2020 onward: Social distancing measures + lockdowns
• April 2020: Fed stimulus suppresses near-term survival anxiety
• May-September 2020: Recovery of demand, with the phased lifting of lockdowns – no panic anymore with number of cases appearing to have plateaued
• October 2020-February 2021: Unprecedented surge in Covid cases forcing a fresh round of lockdowns across the nation
• Since March 2021: Ongoing vaccination drive and gradual re-openings drive an improvement in demand – buoying market sentiment

Considering the monumental rise in Churchill Downs stock since February 2020 levels, we believe that the stock price is stretched. But should you, Buy The Dip In Las Vegas Sands Stock?