Churchill Downs trades at $116.06 per share and has stayed right on track with the overall market, gaining 14.9% over the last six months. At the same time, the S&P 500 has returned 11.7%.
Is there a buying opportunity in Churchill Downs, or does it present a risk to your portfolio? See what our analysts have to say in our full research report, it’s free for active Edge members.
Why Do We Think Churchill Downs Will Underperform?
We don't have much confidence in Churchill Downs. Here are three reasons there are better opportunities than CHDN and a stock we'd rather own.
1. Long-Term Revenue Growth Disappoints
A company’s long-term performance is an indicator of its overall quality. Any business can put up a good quarter or two, but many enduring ones grow for years. Over the last five years, Churchill Downs grew its sales at a 22.2% annual rate. Although this growth is acceptable on an absolute basis, it fell slightly short of our standards for the consumer discretionary sector, which enjoys a number of secular tailwinds.
2. Mediocre Free Cash Flow Margin Limits Reinvestment Potential
If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.
Churchill Downs has shown poor cash profitability over the last two years, giving the company limited opportunities to return capital to shareholders. Its free cash flow margin averaged 10.8%, lousy for a consumer discretionary business.
3. New Investments Aren’t Moving the Needle
ROIC, or return on invested capital, is a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).
We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Unfortunately, Churchill Downs’s ROIC has stayed the same over the last few years. If the company wants to become an investable business, it must improve its returns by generating more profitable growth.
Final Judgment
We see the value of companies helping consumers, but in the case of Churchill Downs, we’re out. That said, the stock currently trades at 17.9× forward P/E (or $116.06 per share). This valuation is reasonable, but the company’s shaky fundamentals present too much downside risk. There are better stocks to buy right now. Let us point you toward a top digital advertising platform riding the creator economy.
Stocks We Like More Than Churchill Downs
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