Why Churchill Downs Is A Good Bet Ahead Of The Kentucky Derby

Courtesy of Benzinga.

Shares of Churchill Downs, Inc. (NASDAQ: CHDN) have been off and running so far in 2015, and now they are getting a boost from Wells Fargo's latest note.

On February 27, Wells Fargo released a research note, "Healthy Q4 Results – Strong Trends Ahead of Derby," maintaining its Outperform rating while revising its 2015 earnings estimate up to reflect the healthy environment for future growth.

WFC increased its "2015/2016 EPS estimates from $3.95/$4.69 to $4.00/$4.71" and maintained its "valuation range at $120-125."

Wells valuation range "is based on a blended 9.6-10.0x 2016E Net EBITDA, less net debt." Risk factors include "a soft U.S. macro environment, and new casino supply."

Wells Fargo – Rationale

Churchill Downs remains a top Gaming idea for 2015 at Wells. Positive catalysts include:

• "…additional asset purchases or deployment of cash, legalization of gaming in KY, (gaming expansion in IL, and continued growth in the Kentucky Derby asset."
• CHDN reported "healthy Q4 results driven by strong Gaming profitability and impressive initial results from its recently closed Big Fish acquisition."
• Wells remains a buyer, citing CHDN's: "(1) strong FCF growth; (2) compelling valuation, supported by iconic, high ROIC assets; and (3) several layers of attractive growth options."

Q4 Gaming/Online Results

• "CHDN reported Q4 Adjusted EBITDA of $24.7MM (ex-Big Fish), 13% above [WFC] estimate of $21.8MM."
• "Net/net, combined Gaming/Online EBITDA was 7% better than [WFC] estimate. Notably, "2015/2016E EBITDA estimates remain relatively unchanged."
• Racing: Strong early trends for Derby "Management noted that its Racing segment ex-Derby continues to be challenging. It does not see trends changing in 2015, and will continue to focus on improving cost structure going forward."
• However, CHDN "indicated that key metrics for this year's Derby are tracking ahead of prior year, and its construction project remains on budget and on schedule."
• Wells is "conservatively estimating Derby growth of 5% Y/Y in 2015 ($5MM EBITDA)."

Casinos (Gaming): Profitability Remains Strong

• "Revenue weakness at several properties was offset by growth at Oxford."
• Churchill Downs "continues to focus on operational efficiency, and its Gaming segment benefited from improved profitability, with margins (ex MVG) up ~200bps Y/Y to 25.3%."
• "CHDN's gaming assets should benefit from lower gas prices… notably, more trips and higher win per trip in Q4, particularly from the higher and middle tiers of its database."
• "Big Fish is performing in line with Management expectations… bookings increased 33% Y/Y in Q4 and 20% Y/Y for 2014."
• "Management stated that growth is in line with expectations, and expects to give more detailed commentary on trends after Q1."

The stock is up almost 3 percent on Friday, and just hit a new 52-week high.

Image credit: Bill Brine, Wikimedia

Posted-In: Wells FargoAnalyst Color Long Ideas Analyst Ratings Trading Ideas Real Estate Best of Benzinga