Shares of Churchill Downs (NASDAQ: CHDN) could see a boost thanks to the company’s plans to enhance its iconic Kentucky racetrack ahead of next May’s Kentucky Derby. Truist Securities analyst Barry Jonas recently held discussions with Churchill executives at the legendary venue, emerging optimistic about the potential impact of these improvements. He has issued a “buy” rating on the stock with a price target of $166, suggesting a potential upside of around 20% from current levels.
The gaming company is set to invest between $80 million to $90 million in renovating the grandstand at its Kentucky racetrack. This announcement coincided with the release of the company’s second-quarter earnings report. The operator expects these enhancements to be completed before the 2025 Derby. Jonas predicts that a full return on this investment will be realized within eight years.
“We see multiple opportunities for additional value-enhancing projects at the track, given sizable consumer demand and opportunities to increase spend (and value) per Derby attendee,” Jonas remarked. Churchill Downs is committed to adding new amenities to the historic Kentucky track to bolster the array of festivities and races during Derby Week. In 2023, the handle for Derby Week and the Derby itself hit record highs.
Jonas identified the Kentucky Derby as “the crown jewel of the portfolio” for Churchill Downs, noting its significance as ticket sales account for 60% of the operator’s Derby Week revenue. He suggested that the company has room to further improve the track through capital expenditures.
Previous enhancements at the track have already proven successful. The Derby remains one of the most sought-after live sporting events in the United States, with demand for premium seating consistently outpacing supply, according to Churchill management. A third of Derby ticket sales are secured through three- to seven-year contracts that buyers cannot cancel, while the other two-thirds are sold in advance of the race.
As for Churchill’s TwinSpires, which set Derby records last year, Jonas described it as “slow, steady, and resilient.” He noted that TwinSpires is benefiting from horseracing deals with DraftKings and FanDuel.
Churchill Downs also operates 12 regional casinos across 10 states, as well as historical horse racing (HHR) facilities in Kentucky, Virginia, and soon, in New Hampshire. Jonas pointed out that the stock trades at a premium compared to others in his coverage universe but cautioned that Churchill isn’t directly comparable to traditional regional casino operators.
Jonas also commented on the sluggish start for Derby City Gaming, a $90 million HHR venue that opened last December in downtown Louisville. Despite its slow ramp-up, Churchill executives are not overly concerned. They highlighted Newport and Turfway as examples of other properties that had slow starts but eventually saw improvements.
Jonas added that the expansion of Churchill’s HHR facility in Owensboro, Kentucky, is on track to be completed and open early next year.
