Like the upper management of all publicly traded companies, the top executives of Churchill Downs, Inc. (CDI) receive their share of criticism from a variety of sources. In the Internet age, anyone with access to a computer can have their say. The reality is that the facts paint a picture of a masterful job of shepherding CDI through turbulent times, the turbulence caused largely by a languid economy and a pari-mutuel industry in free fall.

The economic tsunami that has roiled the American economy has taken its toll on most companies, but firms operating in leisure industries–like gaming–that depend on discretionary spending have been especially vulnerable. Witness some of the problems at the big casino companies. Prominently, for example, Caesars Entertainment Corporation—the world’s largest—has close to a negative net worth.

CDI’s net revenues from its Racing Operations segment (four racetracks) fell by 7% from 2008 to 2009 and by 4% from 2009 to 2010. By contrast, the company’s net revenues from its On-Line Business segment increased by 33% in 2008-2009 and by 68% in 2009-2010. CDI’s net revenues from its Gaming segment grew by 18% in 2008-2009 and by 98% in 2009-2010.

These figures reflect the continuing decline in U. S. pari-mutuel wagering and CDI’s  expanding presence in advance deposit wagering and casino gaming. Most notably, the company acquired and Harlow’s Casino in Greenville, Mississippi.

When CDI’s return to shareholders is compared to returns from similar companies, CDI does well. In the five-year period 2005-2010, total returns (stock appreciation plus reinvestment of dividends) from holding CDI’s stock have generally been equal to or better than four peer indices (the Russell 2000 Index, the NASDAQ Market Index, Morningstar Gambling, and Hemscott Leisure). This is remarkable in view of the headwinds in the pari-mutuel industry and the legal constraints that have prohibited CDI from offering alternative gaming in two major  markets (Chicago and Louisville), where its racetracks are proximate to casinos. Not many companies could be precluded from extending their product line (gaming) in two prime markets, where there is fierce competition, and still do as well on key financial metrics as CDI.

CDI stock is presently trading at about 33 times its previous 12-months earnings. This is a lofty multiple for a mature non-high-tech company whose traditional core market is in decline. The stock may be overvalued or investors may be anticipating that the company’s strategic plan to diversify within the gaming/leisure industry will eventually produce much higher earnings.

Compared to the first quarter of 2010, CDI dramatically improved its financial performance in the first quarter of 2011 and should do much better still for the remainder of 2011; attendance and handle were some of the best ever for the Kentucky Derby and Kentucky Oaks and the Breeders’ Cup in November will be another boost.

The strategic accomplishment of CDI executives in recent years has largely been an untold story in the racing industry. Undoubtedly, some people will lament the decline of on-track pari-mutuel wagering at CDI and the growth of advance deposit wagering and gaming. Yet the fiduciary responsibility of the board of directors and management in publicly traded companies is shareholder wealth maximization and CDI strategy is consistent with that legal mandate.

(Full disclosure: The author does not currently own stock in Churchill Downs, Inc. and is not personally acquainted with upper management or members of the board of directors.)

Copyright © 2011 Horse Racing Business



  1. A balanced analysis. Churchill management has often been second-guessed without much attention to the hard data you identified. Compared to a Google, its returns have been slim, but compared to its industry peer group, Churchill has done pretty darn well.

  2. optionman says

    Evans and company have delivered. The concern is if they can keep it up. Don’t screw up the BC, guys.

  3. They’re strategy is purely earnings with their online strategy focused around giving back as little as possible to the industry. This is a gaming company with little to no interest in the racing industry, please notice that they do not include online revenue in the racing category. Funny, thought they we’re taking bets on races. These are bad guys for the industry in the longrun

  4. 2cents,

    Management has no choice. If you were in charge and didn’t pursue gaming you would not be in long after the stock tanked.

  5. Just to add a bit to what 2cents pointed out: the shift of the race track Churchill Downs to the gaming and online entity CDI, Inc. may produce a decent medium-term return to its shareholders, and especially to its senior management, but it doesn’t augur well for horse racing. CDI has been at loggerheads with horsemen’s groups at most of the tracks it operates, and its decision to reflect simulcast and online betting as “Racing” income shows where the company’s heart is. Horse racing really isn’t a “business;” it’s as much a way of life, for both horsemen and fans, where you hang on and hope to make enough to survive, rather than seeking to maximize earnings. For those sorts of ways of life, a lot of different folks, from the Catholic Church to the Communist Party, have figured out that profit maximization shouldn’t be the only goal. But the logic of capitalism tells CDI to do exactly what it’s doing, at whatever cost to racing.

  6. Churchill Downs is run by racing people. The Chairman and CEO owns and breeds racehorses on his Bluegrass farm and the board of directors has owners/breeders Duchossois, Humphrey, and Rankin. These folks know the ins and outs of racing up close and are some of the most prominent people in the business. If it were not for the Duchossois family, Arlington Park would not have been rebuilt after the fire at the track. I’d say that they have racing’s best interests at heart.

  7. NotaCDIfan says

    By selling their signals for so much but buying signals cheaply, they are planting a groundwork to kill off smaller tracks, or causing them to struggle more than they should.
    The smaller tracks are the lifeblood of the industry. It is where startup owners and horseplayers get their start.
    They are also killing horse racing by stifling rebate shops, either not selling their signals (which might even be illegal if the Justice Dept cared) or by selling the signals too high (which stifles handle and causes less overall interest in horse racing as rebate shops are the only growing sector in the market right now). And it isn’t like the horsemen groups at CDI tracks are benefitting from this as Steve points out.
    CDI is one of the main reasons we are experiencing a handle decline right now, and an interest decline as well.
    They don’t care about horse racing growth, they are just happy with getting a bigger cut of a shrinking pie, which causes the pie to shrink even more.
    CDI might be good for shareholders today, but they are horrible for horse racing.

  8. RacingFan says

    It is tough to make money in racing. Racing needs people with real solutions. When the going got tough, CDI management ran away from racing. Congratulations. It doesn’t take an MBA to understand that every racing day that CDI cuts lowers expenses and makes average handle go up, until there is only Derby weekend left.


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