On February 28, 2018, Churchill Downs, Inc. (CHDN) released its annual Securities & Exchange Commission 10-K report of operations for 2017.

At the close of 2017, CHDN owned four racetracks outright and half of another, eleven off-track betting facilities, six gaming properties, and online businesses that encompassed TwinSpires, United Tote, Bloodstock Research & Information Services, and an interest in HRTV.  The casinos offered 4,200 slots, 55 gaming tables, 36 poker tables, 185 lodging rooms, and 775 poker machines.

CHDN racetracks were listed as Arlington Park (Chicago), Calder (Miami), Churchill Downs (Louisville), Fair Grounds Race Course (New Orleans), and a 50 percent  interest in Miami Valley (Dayton, Ohio), a harness-racing racino.  TwinSpires is the largest online wagering platform in the United States.

(In January 2018, CHDN completed the sale of Big Fish Games, a mobile gaming company, for $990 million in order to refocus on its core operations.  $500 million of the proceeds were earmarked for repurchasing CHDN’s common stock.  On February 28, 2018, CHDN announced that during the current year it will complete the acquisition of Presque Isle Downs & Casino in Erie, Pennsylvania, offering Thoroughbred racing and gaming, and Lady Luck Casino in Vicksburg, Mississippi.)

Net Revenues for 2017 were $882.6 million compared to $822.4 in 2016.  The racetracks and TwinSpires accounted for $512.9 million or 58.1% of total revenues.  Casinos contributed $350.5 million in net revenues (39.7%) and “Other Investments” the remaining $19.2 million (2.2%).

CHDN reported Net Income in 2017 of $140.5 million in contrast to $108.4 million in 2016.  Diluted Earnings per share were $8.77 in 2017 and $6.42 in 2016.

CHDN’s stock price rose from $142.37 at the beginning of 2017 to $239.55 at the close of the year, an increase of 97.2%, and thereby trounced all the major indexes.  (At this writing, CHDN stock is about $258 per share for an appreciation of close to 10% in 2018.)

While it is hard to quibble with the wealth that CHDN has created for its shareholders, there are three cautionary notes.

First, CHDN is highly leveraged, which makes it very susceptible to escalating borrowing costs in the present environment of planned interest-rate increases by the Federal Reserve (three boosts in 2018 and three more in 2019).  As of December 31, 2017, CHDN’s capital structure was comprised of 27% equity and 73% debt.  The heavy reliance on financing with debt will increasingly raise CHDN’s cost of capital.

Second, CHDN’s current price-to-2017-earnings ratio is around 30 to 1.  2018 earnings will need to meet the market’s expectations to maintain a 30 to 1 multiple.

Lastly, CHDN’s board chairman, G. Watts Humphrey Jr., is retiring from this position on April 24, 2018 and the board has elected insurance executive Alex Rankin to take his place.  (CHDN is in the minority of public companies with different individuals filling the slots of board chairman and CEO.)  Whether Mr. Rankin can continue the success of Mr. Humphrey remains to be seen, especially with a heavily leveraged company facing the headwind of rising interest rates.

Copyright © 2018 Horse Racing Business

Full disclosure:  The author of this article, William Shanklin, is presently a CHDN shareholder.