Churchill Downs has been treading water for the past six months, recording a small loss of 4.2% while holding steady at $132.73. The stock also fell short of the S&P 500’s 7.5% gain during that period.
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.We're cautious about Churchill Downs. Here are three reasons why CHDN doesn't excite us and a stock we'd rather own.
Why Is Churchill Downs Not Exciting?
Famous for hosting the Kentucky Derby, Churchill Downs (NASDAQ:CHDN) operates a horse racing, online wagering, and gaming entertainment business in the United States.
1. 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 1.6%, lousy 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.
2. Previous Growth Initiatives Haven’t Paid Off Yet
Growth gives us insight into a company’s long-term potential, but how capital-efficient was that growth? 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 7.4%, somewhat low compared to the best consumer discretionary companies that consistently pump out 25%+.
3. Projected Revenue Growth Is Slim
Forecasted revenues by Wall Street analysts signal a company’s potential. Predictions may not always be accurate, but accelerating growth typically boosts valuation multiples and stock prices while slowing growth does the opposite.
Over the next 12 months, sell-side analysts expect Churchill Downs’s revenue to rise by 11.1%, a deceleration versus its 25.6% annualized growth for the past two years. This projection is underwhelming and suggests its products and services will face some demand challenges.
Final Judgment
Churchill Downs’s business quality ultimately falls short of our standards. With its shares trailing the market in recent months, the stock trades at 19.1× forward price-to-earnings (or $132.73 per share). 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. We’d suggest looking at The Trade Desk, the nucleus of digital advertising.
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