Churchill Downs (CHDN)

Racing, gaming, and entertainment company Churchill Downs (NASDAQ:CHDN) met Wall Street’s revenue expectations in Q1 CY2025, with sales up 8.7% year on year to $642.6 million. Its non-GAAP profit of $1.07 per share was 3.5% above analysts’ consensus estimates.

Company Overview

Famous for hosting the Kentucky Derby, Churchill Downs (NASDAQ:CHDN) operates a horse racing, online wagering, and gaming entertainment business in the United States.

Gaming solution companies operate in a dynamic and evolving market, and the digital transformation of the gaming industry presents significant opportunities for innovation and growth, whether it be immersive slot machine terminals or mobile sports betting. However, the gaming solution industry is not without its challenges. Regulatory compliance is a crucial consideration as companies must navigate a complex and often fragmented regulatory landscape across different jurisdictions. Changes in regulations can impact product offerings, operational practices, and market access, requiring companies to maintain flexibility and adaptability in their business strategies. Additionally, the competitive nature of the industry necessitates continuous investment in research and development to stay ahead of competitors and meet evolving consumer demands.

Competitors in the gaming and horse racing industry include MGM Resorts (NYSE:MGM), Caesars Entertainment (NASDAQ:CZR), and PENN Entertainment (NASDAQ:PENN).

A company’s long-term sales performance can indicate its overall quality. Any business can have short-term success, but a top-tier one grows for years. Thankfully, Churchill Downs’s 16.2% annualized revenue growth over the last five years was decent. Its growth was slightly above the average consumer discretionary company and shows its offerings resonate with customers.

We at StockStory place the most emphasis on long-term growth, but within consumer discretionary, a stretched historical view may miss a company riding a successful new product or trend. Churchill Downs’s annualized revenue growth of 17.9% over the last two years is above its five-year trend, suggesting some bright spots.

We can better understand the company’s revenue dynamics by analyzing its three most important segments: Horse Racing, Gaming, and TwinSpires, which are 42.4%, 41%, and 16.6% of revenue. Over the last two years, Churchill Downs’s revenues in all three segments increased. Its Horse Racing revenue (live and historical) averaged year-on-year growth of 36.5% while its Gaming (casino games) and TwinSpires (horse racing subsidiary) revenues averaged 14.3% and 4.5%.

This quarter, Churchill Downs grew its revenue by 8.7% year on year, and its $642.6 million of revenue was in line with Wall Street’s estimates.

Looking ahead, sell-side analysts expect revenue to grow 6.9% over the next 12 months, a deceleration versus the last two years. This projection doesn't excite us and implies its products and services will face some demand challenges.

Churchill Downs’s operating margin has risen over the last 12 months and averaged 24.4% over the last two years. On top of that, its profitability was elite for a consumer discretionary business thanks to its efficient cost structure and economies of scale.

In Q1, Churchill Downs generated an operating profit margin of 20.9%, in line with the same quarter last year. This indicates the company’s overall cost structure has been relatively stable.

Revenue trends explain a company’s historical growth, but the long-term change in earnings per share (EPS) points to the profitability of that growth – for example, a company could inflate its sales through excessive spending on advertising and promotions.

Churchill Downs’s EPS grew at a spectacular 24.9% compounded annual growth rate over the last five years, higher than its 16.2% annualized revenue growth. This tells us the company became more profitable on a per-share basis as it expanded.

In Q1, Churchill Downs reported EPS at $1.07, down from $1.13 in the same quarter last year. Despite falling year on year, this print beat analysts’ estimates by 3.5%. Over the next 12 months, Wall Street expects Churchill Downs’s full-year EPS of $5.84 to grow 10.6%.

Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.

Churchill Downs has shown weak cash profitability over the last two years, giving the company limited opportunities to return capital to shareholders. Its free cash flow margin averaged 5.8%, subpar for a consumer discretionary business. The divergence from its good operating margin stems from its capital-intensive business model, which requires Churchill Downs to make large cash investments in working capital and capital expenditures.

Churchill Downs’s free cash flow clocked in at $233.9 million in Q1, equivalent to a 36.4% margin. This result was good as its margin was 19.5 percentage points higher than in the same quarter last year, but we wouldn’t put too much weight on the short term because investment needs can be seasonal, causing temporary swings. Long-term trends carry greater meaning.

EPS and free cash flow tell us whether a company was profitable while growing its revenue. But was it capital-efficient? Enter ROIC, a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).

Churchill Downs historically did a mediocre job investing in profitable growth initiatives. Its five-year average ROIC was 7.9%, somewhat low compared to the best consumer discretionary companies that consistently pump out 25%+.

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. Fortunately, Churchill Downs’s ROIC averaged 2 percentage point increases over the last few years. This is a good sign, and we hope the company can continue improving.

Churchill Downs reported $174.2 million of cash and $4.88 billion of debt on its balance sheet in the most recent quarter. As investors in high-quality companies, we primarily focus on two things: 1) that a company’s debt level isn’t too high and 2) that its interest payments are not excessively burdening the business.

With $1.16 billion of EBITDA over the last 12 months, we view Churchill Downs’s 4.0× net-debt-to-EBITDA ratio as safe. We also see its $291.7 million of annual interest expenses as appropriate. The company’s profits give it plenty of breathing room, allowing it to continue investing in growth initiatives.

It was encouraging to see Churchill Downs beat analysts’ EPS expectations this quarter. On the other hand, its TwinSpires revenue missed. Zooming out, we think this was a decent quarter featuring some areas of strength but also some blemishes. The areas below expectations seem to be driving the move, and the stock traded down 2% to $102.99 immediately after reporting.

Updated: May 21, 2025 at 10:46 PM EDT

The latest quarterly earnings matters, sure, but we actually think longer-term fundamentals and valuation matter more. Investors should consider all these pieces before deciding whether or not to invest in Churchill Downs.

Churchill Downs isn’t a terrible business, but it doesn’t pass our bar. Although its revenue growth was decent over the last five years, it’s expected to deteriorate over the next 12 months and its relatively low ROIC suggests management has struggled to find compelling investment opportunities. And while the company’s spectacular EPS growth over the last five years shows its profits are trickling down to shareholders, the downside is its low free cash flow margins give it little breathing room.

Churchill Downs’s P/E ratio based on the next 12 months is 14.5x. This valuation is reasonable, but the company’s shakier fundamentals present too much downside risk. We're pretty confident there are superior stocks to buy right now.

Wall Street analysts have a consensus one-year price target of $136.86 on the company (compared to the current share price of $94.35).

Although the price target is bullish, readers should exercise caution because analysts tend to be overly optimistic. The firms they work for, often big banks, have relationships with companies that extend into fundraising, M&A advisory, and other rewarding business lines. As a result, they typically hesitate to say bad things for fear they will lose out. We at StockStory do not suffer from such conflicts of interest, so we’ll always tell it like it is.

Want to invest in a High Quality big tech company? We’d point you in the direction of Microsoft and Google, which have durable competitive moats and strong fundamentals, factors that are large determinants of long-term market outperformance.

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