In a recent decision that holds significant implications for the gaming industry, the Supreme Court of Virginia ruled that skill-based games do not enjoy First Amendment protections, relegating them back to the realm of illegality within state boundaries. This development could potentially channel considerable benefits towards Churchill Downs (NASDAQ: CHDN), a renowned name in the gaming sphere.
Esteemed analyst Barry Jonas of Truist Securities, in an enlightening note to his clients, commented that the reestablished ban on skill games in Virginia could prove to be a “meaningful positive” for Churchill Downs. “We view the state Supreme Court’s ruling as a major triumph for the company, especially considering the timing – mere months following the closure of the weighty Exacta transaction,” shared Jonas, adding that this ruling occurs in the wake of a comparable ban imposed by Kentucky around four months ago, underscoring CHDN management’s adept political finesse.
Currently, the gaming giant possesses 2,750 historical horse racing machines within Virginia—with aspirations to nearly double their count to a robust 5,000. Jonas indicated that permitting the existing 9,000 skill games machines to operate would have inevitably impeded Churchill’s progress in optimizing its HRM revenue potential.
The highest court in Virginia choosing to reimpose the ban on skill games devices has a crucial bearing on Churchill Downs’ future expansion plans in the state. While some investors instinctively relate this operator to horse racing, given its iconic racing track in Kentucky, Virginia represents a promising new horizon for the company. The state could energize the operator’s long-term growth plans. Churchill Downs owns a 50% interest in a proposed Richmond casino project, alongside an expanding number of HHR venues.
The operator’s prevailing foothold in Virginia includes seven Rosie’s 777 Gaming Emporiums, with a vision for introducing the Rose Gaming Resort at Dumfries. Jonas, commenting on the recent court ruling, conjectured, “Given the Supreme Court’s judgement that the lower-court acted inappropriately, we suspect the options for skill-based companies are somewhat minimal.”
While optimally timing the ban’s implementation remains unclear, Jonas anticipates it to be prompt, driving substantial benefits to CHDN’s Virginia properties.
Despite CHDN’s stock experiencing a modest upturn of 6.60% year-to-date, most of Wall Street continues to express strong enthusiasm for the firm among its gaming counterparts. Virginia’s potential is significantly contributing to this positive outlook.
Dan Guglielmo, a Capital One Securities analyst, in a recent client note, revealed that the company has approximately $1.1 billion allocated towards developmental expenses over the next 18 months. He envisions an expansion of the slot/historical racing machines portfolio by 21%, table games by 9%, and rooms by 25% by 2025.
Guglielmo kicked off coverage of Churchill Downs with a robust ‘overweight’ rating and a $144 price target, indicating a promising upside of 27.7% from the stock’s Oct. 16 close.
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