Churchill Downs Suffers Derby Downgrade, Analyst Cites No Fans Announcement

Posted on: August 24, 2020, 10:30h. 

Last updated on: August 24, 2020, 02:54h.

Shares of Churchill Downs (NASDAQ:CHDN) are trading lower Monday after Susquehanna analyst Joseph Stauff downgraded the name following the announcement that the Kentucky Derby will be run without fans in the stands.

No Derby Fans Downgrades Churchill Downs Stock
No fans at the Kentucky Derby this year is a drag on Churchill Downs stock, says an analyst. (Image: CNBC)

After the close of US markets last Friday, the company said America’s most venerable horse race will be held at the eponymous track on Sept. 5, but spectators will not be present. Today, the first trading day following that announcement, Churchill Downs stock is lower by 1.50 percent in midday trading. That’s after Stauff trimmed his rating to “neutral” from “positive.”

At current levels of $174/share and CHDN’s announcement on Friday post-close that it would NOT have spectators at the Kentucky Derby, we see limited upside beyond our price target,” said the Susquehanna analyst.

He has a price forecast of $185 on the stock, implying an upside of less than seven percent from the Aug. 21 close.

Pandemic Problem

The Run for the Roses is traditionally held on the first Saturday of May. But as has been the case with so many marquee sporting events around the world this year, the coronavirus pandemic forced a rescheduling of the race.

In late June, Kentucky Gov. Andy Beshear (D) granted approval for the Derby to be held in front of a limited number of fans. But amid a spike of COVID-19 cases in the region, that plan is being scrapped. Since 2005, the Triple Crown race has drawn north of 150,000 spectators to the track. This year, it will be held without fans for the first time in its 146-year history.

Stauff said an estimated ~10 percent COVID-19 positivity rate in Louisville, coupled with the “continued impact of the social unrest” in the area, and a two percent Kentucky-wide positivity rate were among the reasons Churchill Downs was forced to go the no-fans route.

That adds the Derby to the growing list of big-time US sporting events held without spectators. That was the case for the PGA Championship earlier this month and Sunday’s Indianapolis 500. Like the Derby, the Masters Tournament is enduring a schedule change. It’s usually held in the first week of April and will be held in November without patrons and spectators.

Online Offset

The Derby is a money-maker for CDI, and the loss of fans will likely crimp the operator’s bottom line, because that equals no turnover from ticket and food and beverage sales, among other revenue generators. Last year, Derby Week represented one percent of the company’s annual earnings before interest, taxes depreciation and amortization (EBITDA).

As for the betting handle, the Derby card generated $250.9 million in 2019. But just 8.4 percent of that total was placed at the track, indicating online betting is picking up plenty of slack and could reduce the sting of this year’s no-spectators scenario. Stauff, the Susquehanna analyst, is bullish on CDI’s online wagering prospects.

In particular, CHDN’s valuation is largely geared now to its online division’s outperformance this year, and we expect that to continue in 2H20 with revenue growth of ~46 percent,” he said.

Including Stauff, three analysts cover the stock, with the other two having bullish ratings on the name.