JHVEPhoto
In February of this 12 months, I concluded that shares of Churchill Downs (NASDAQ:CHDN) have been racing greater because it continued to construct out its empire with its announcement of an enormous acquisition. I’ve grown way more appreciative of the enterprise over time, as its observe report is difficult to argue with, but concern that now shouldn’t be the time to become involved.
A Fast Recap
Churchill Downs is finest recognized from the Kentucky Derby, however exterior its horse racing actions, the corporate has substantial property associated to casinos and on-line video games as effectively. Forward of my take earlier this 12 months, I went again all the way in which to 2017 when the corporate divested its Large Fish operations with proceeds successfully used to purchase again low-cost inventory and reinforce the enterprise in different methods.
Shares really traded round $220 in 2017, the identical degree as they did earlier this 12 months, however that’s misrepresenting the efficiency as shares have been break up on a three-for-one-basis within the meantime. A $882 million enterprise which generated $286 million in EBITDA in 2017 had grown to $1.Three billion in 2019 on which EBITDA got here in at $451 million. Earnings per share energy had almost doubled over the identical time interval, adjusted for the stock-split in fact.
Revenues fell to $1.05 billion in 2020, no shock given the character of the actions and the affect of the pandemic and associated lockdowns, however shares had rallied to $260 early in 2021 already in anticipation of an awesome 12 months. That has turned out to be actuality as revenues have been up 58% to $1.23 billion within the first 9 months of the 12 months, with earnings coming in at $5.23 per share already, on observe to come back in round $7 per share.
Internet debt stood at $1.65 billion, and with EBITDA trending at $670 million, that labored all the way down to a 2.5 instances leverage ratio. The 39 million shares traded at $220 early this 12 months, for an $8.6 billion fairness valuation, or $10.2 billion enterprise valuation. This was equal to 6-7 instances gross sales, 15 instances EBITDA and 30 instances earnings, steep multiples by all means
Simply forward of the discharge of the fourth quarter outcomes for 2021, Churchill introduced a $2.48 billion deal to accumulate the Peninsula Pacific Leisure Firm, a deal valued at roughly 1 / 4 of its personal valuation on the time. With the deal the corporate would purchase the Colonial Downs Racetrack, extra services equivalent to casinos and the Arduous Rock Lodge & On line casino in Sioux Metropolis. The 9 time EBITDA a number of was a bit cheaper, because the affect on the underside line was onerous to gauge. Professional forma web debt was seen round $3.Eight billion as the corporate introduced a big deal to promote land to Blackstone as effectively.
I believed that earnings may rise to $9 per share, for a 25 instances earnings a number of, but together with almost Four instances leverage, the valuations have been actually not low-cost. Given this excessive valuation, though accompanied by a robust observe report, I concluded to develop into a purchaser within the excessive a whole bunch, because the market at giant was nonetheless a lot stronger in fact, not impacted by rising rates of interest but.
Stagnation
Since my upbeat but cautious tone in February, shares of Churchill have been buying and selling vary certain between $180 and $240 per share, at present exchanging arms proper in the midst of this vary at $210 per share.
In February, the corporate posted its full 12 months outcomes with revenues as much as $1.60 billion on which $627 million in EBITDA was reported, in addition to web earnings of $249 million, equal to $6.35 per share. The corporate has seen strong progress within the first two quarters of the 12 months, closing on the sale of land to Blackstone and retained earnings forward of the Peninsula deal, for which the corporate already secured borrowing effectively upfront of the deal closing, nice timing with the advantage of hindsight.
In October, the corporate posted third quarter outcomes which revealed a modest year-over-year decline in gross sales, with earnings per share down eight cents to $1.49 per share, albeit that the EBITDA efficiency elevated a bit. Internet debt got here in at $1.49 billion forward of the Peninsula deal, nonetheless large quantities as professional forma web debt would soar to $4.zero billion, albeit that professional forma EBITDA will probably exceed the billion mark following some operational beneficial properties seen this 12 months. The cope with Peninsula closed on November 1, so within the fourth quarter, as the true affect of the deal is simply seen within the new 12 months in fact.
Regardless of a nonetheless elevated leverage state of affairs, the corporate really introduced one other bolt-on, but substantial deal. The week forward of Christmas, the corporate introduced 1 / 4 of a billion deal to accumulate Exacta Programs, a know-how supplier of historic horse racing operations, with few particulars introduced on the deal.
Therefore, we stay considerably in the identical state of affairs. Earnings are nonetheless trending at $7-Eight per share in regular situations (forward of the Peninsula deal) and leverage is excessive, partly the results of the continued operational capital expenditures made by the enterprise.
Given the large enhance in rates of interest, the debt is extra critical than was the case at the beginning of the 12 months, as total valuation multiples have come down, which makes that the relative outperformance of Churchill appears to be pushed by the long run observe report, however it doesn’t essentially create a pleasant set-up for potential and perspective traders right here. That stated, it’s too early to write down off the shares right here because the Peninsula deal may create a roadmap for earnings to pattern round $10 per share, however for that loads of issues nonetheless must work out.