Churchill Downs, Inc. (CHDN) has announced it will be acquiring casinos in Pennsylvania and Mississippi, as it prepares to capitalize on legalized sports betting. The company will buy the Presque Isle Downs & Casino in Erie, PA (for $178.9 million) and the Lady Luck Casino (for $50.6 million) in Vicksburg, MS, from current owner, Eldorado Resorts (ERI). Both PA & MS have passed sports betting legislation that would change their laws, should the SCOTUS strike down PAPSA. CHDN also owns brick and mortar casinos in Illinois, Kentucky and Louisiana, 3 other states actively working towards sports betting legalization.
Howie Long-Short: Churchill Downs released Q4 ’17 financials on February 28th. Q4 ’17 adjusted EBITDA was +23% YOY (to $37.6 million) on net revenue that rose 11% YOY (to $179.8 million). Changes to the recent U.S. tax code added $57.7 million to Q4 net income. CHDN shares are up 4.5% since the company issued their Q4 earnings report, closing at a 52-week high on Tuesday ($268.20).
Fan Marino: While Presque Isle Downs & Casino is among the lowest revenue generating casinos in Pennsylvania, it’s a significant acquisition for CHDN; PA recently legalized online gambling and the law passed covers mobile wagering on sporting events (assuming permitted by federal law). While land based casinos are profitable, it’s mobile sports betting that really has CHDN excited. TwinSpires, the company’s online horse betting platform, accounted for $256.7 million in ’17 revenue (+15% YOY). One can safely assume the company will look to turn their database of users betting on the ponies, into mainstream sports gamblers.
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The WSJ published a recent story asserting there are few ways to directly invest in sports, a notion we dispute. The article deemed just 7 publicly traded equities to be sports-related and based their conclusion, that fans are better off watching and playing sports than investing in them, on the performance of 2 exchange traded funds; one of which (FANZ) has beat the S&P since its July ’17 inception, which would seem to counter to their argument. The article cites Matt Hougan, the CEO of Inside ETFs, and his belief that most of the economic value within sports (ownership and player contracts) “comes in private transactions”, to support the author’s thesis; but fails to pay consideration to the revenue streams that support those contracts (and generate ownership profits). It’s worth noting that JohnWallStreet follows over 100 sports-related equities.
Howie Long-Short: Sports teams generate revenue from 4 sources; broadcast rights, ticket sales, sponsorships and merchandising. Several publicly traded equities use a similar business model; Churchill Downs (CHDN), International Speedway (ISCA), Dover Motorsports (DVD) and Speedway Motorsports (TRK), and thus should also be included on the list. Others, like Acushnet Holdings Corp. (GOLF) and Callaway Golf Company (ELY), are undeniably directly tied to sports; and no one would claim your basket was unfocused if companies like Nike (NKE), Lululemon (LULU) and Fitbit (FIT) were to be included. Oh, and don’t forget Activision Blizzard’s (ATVI) new esports league (Overwatch); their inaugural season starts today.
Fan Marino: The story names the New York Knicks, New York Rangers (MSG), Atlanta Braves (BATRK), Manchester United (MANU) and Borussia Dortmund (BORUF) as the teams you can purchase equity in. The Toronto Blue Jays, Toronto Maple Leafs (RCI), Juventus F.C. (JVTSF), A.S. Roma (ASRAF) and SS Lazio (BIT: SSL) are also all publicly traded.
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Churchill Downs Inc. (CHDN) has agreed to sell its mobile gaming subsidiary, Big Fish Games, to Aristocrat Technologies for $990 million (ROI of 14%); with the transaction scheduled to close in Q1 ‘18. The sale will enable the company to refocus its efforts on growing the Kentucky Derby, expanding its casino segment, TwinsSpires.com (and other forms of real money gaming) and maximizing thoroughbred racing operations. CHDN held the gaming company for just over 3 years, having acquired Big Fish in 2014 for $885 million. While Big FishGames operated on slimmer margins than the balance of CHDN assets, it still comprised 37% of company revenue and 20% of profits; shareholders must be concerned about how the company plans to replace that business.
Howie Long-Short: Aristocrat Technologies is a subsidiary of Aristocrat Leisure Limited (OTC: ARLUF), a publicly traded gaming company that operates in more than 90 countries. The acquisition makes Aristocrat the 2nd largest social casino publisher globally (far behind Playtika). In Q2 ’17, Playtika controlled 26.1% of the total market (expected to grow to $19 billion by ’22); with ARLUF and CHDN combining for just12.2% combined.
Fan Marino: Yum Brands (YUM) has pulled out as the title sponsor of the Kentucky Derby. The Louisville based Brown-Forman Corp. (BF.B) will take over as the event’s highest profile sponsor in 2018; using the exposure to promote its Woodford Reserve bourbon. Terms of the deal were not disclosed, but it’s estimated that YUM paid $1 million/year under the terms of the agreement signed in 2006. The mint julep is the traditional beverage of the Kentucky Derby. If you’ve never had one, here is a recipe (using Woodford Reserve, of course).
Churchill Downs selling mobile gaming company for almost $1B
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Churchill Downs (CHDN) is making changes to its “Road to the Kentucky Derby” Championship Series; adding a path to the race for European horses, as it looks to stimulate international interest in the 2018 race presented by Yum! Brands (YUM). The “European Road to the Kentucky Derby” will consist of 7 races, with the horse accruing the most points winning an invitation to the race. Last year, CHDN introduced a path for dirt racing horses based in Japan, to participate in the fastest 2 minutes in sports.
Howie Long-Short: Horse racing is one of 4 sports that can be legally gambled on in Japan and as of 2016, that includes on foreign races. In 2015, the country waged $22.5 billion on the ponies and CHDN wants some of that juice. Expanding the Japanese series is only going to get that audience more invested in May’s run to roses.
Fan Marino: Don’t expect a horse that races on foreign soil to win America’s greatest race. It’s been 46 years since Canonero II (Venezuela) won the Kentucky Derby.
Churchill Downs Adds European Path to Derby
Churchill Downs Inc. (CHDN) is building an 85,000 sf, $60 million facility, to host historical race wagering by the fall of 2018. Historical race wagering; or instant racing, is similar to slot machines and models games after previously run races. The company will start with 600 machines, and if successful, could look to add similar facilities to its portfolio in the future.
Churchill Downs CEO sheds more light on $60M gaming facility, Derby’s huge TV showing
Howie Long-Short: What is this, CHDN’s attempt to hedge in case PETA ever gets horse racing banned, like Shamu? Biff Tannen is delivering me a horse racing almanac as we speak. Retirement, here we come.
David Price/Earnings: Sounds like this could be quite profitable down the stretch, if marketed right.
Fan Marino: How big of a degenerate does one have to be, to gamble on a horse race that’s already been completed? Asking for a friend.
Speedway Motorsports (TRK), Dover Motorsports (DVD) & Churchill Downs (CHDN) have reported earnings for the quarter ending July 30th. Below is a recap of each company’s earnings report:
Speedway Motorsports (TRK):
Reported increase in both revenue and net income for Q2 ’17, from same time last year (up to $.68/share from $.62/share). YTD revenue and income figures are also up from 2016.
- Good News: Track rentals & ancillary broadcast rights generating more revenue. Attendance & fan interest is trending upward.
- Bad News: Certain admission revenues are down. Management believes underemployment and the absence of a fiscally strong middle class are hurting numbers.
Speedway Motorsports boosts revenue, income
Dover Motorsports (DVD):
Reported slight increase in revenue and net income for Q2 ’17, from same time last year. Reported earnings of $.14/share remained the same.
- Good News: Increase in broadcasting revenue.
- Bad News: Lower admissions revenue for Dover NASCAR weekend.
Dover Motorsports, Inc. Reports Results for the Second Quarter of 2017
Churchill Downs Incorporated (CHDN):
Reported a 3% increase in revenue and 12% increase in net income for Q2 ’17, from same time last year. Reported earnings of $4.81/share, a 17% increase YOY, and $.30 higher than analyst predictions.
- Good News: Increase in racing revenues from a strong Kentucky Derby week. Equity investments and organic growth lead to increase in casino revenues.
- Bad News: Gaming company Big Fish Games saw net revenues decrease by $12.6 million.
Churchill Downs Incorporated Reports 2017 Second Quarter Results
Howie Long-Short: I’m skeptical when companies are still blaming the economy/underemployment in 2017.
Fan Marino: Never been a NASCAR guy. Just can’t get excited by someone driving in circles…even if it is really fast.
The board for Churchill Downs (CHDN) authorized the buyback of $250 Million in outstanding common shares. The authorized amount includes $114.6 Million that remains from a buyback program authorized back in February 2016. Buyback programs are often an indication that a company believes its stock is undervalued.
Churchill Downs Incorporated Announces New $250 Million Share Repurchase Program
Fan Marino says: Drinking a mint julep at the Kentucky Derby should be on EVERY sports fan’s bucket list. JWS road trip in 2018? Who’s coming with me?
Howie Long-Short opines: The Kentucky Derby is one of a kind, but how bright is the future of horse racing?