Churchill Downs Might Come Up Roses in Virginia

The Kentucky Derby — the marquee event on Churchill Downs’ (NASDAQ: CHDN) annual slate — is known as “the run for the roses,” but a different rose could be additive to the operators investment thesis.

The operator’s recently opened Rose casino hotel in Dumfries, Va. hasn’t yet been open to the general public for two months and while there’s been lumpiness in its early innings, Stifel analyst Jeffrey Stantial said there are positive signs emerging from the new gaming venue. In a recent report to clients, he reiterated a “buy” rating on the stock with a $164 price target. That implies upside of 24% from current levels.

As expected, the property has been successful drawing players from Manassas, Woodbridge, and Fredericksburg, as well as Washington, DC where CHDN competes against MGM’s National Harbor,” wrote the analyst.

Churchill’s venues in Kentucky and Virginia are widely viewed as growth drivers for the operator and though it’s still in its infancy, The Rose’s early trajectory indicates the venue could live up to its billing as a catalyst for Churchill stock.

The Rose Could Outperform

The gaming company has an expansive portfolio of live and historical (L&H) horseracing venues in Virginia and consensus estimates indicate those properties should generate $15 million to $16 million in monthly gross gaming revenue (GG)R into next year.

“Management noted CHDN is investing in marketing currently to help build database (TV, social media, radio, online ads, billboards), with margins expected to ramp gradually through 2025 as a result. CHDN is also making typical post-opening staffing optimization adjustments, though employee turnover has been better than expected – partly due to the ability to train pre-opening at Rosie’s,” according to the analyst.

He added that using the operator’s Derby City property as a comparison, The Rose could eventually notch earnings before interest, taxes, depreciation, and amortization (EBITDA) margins of 50%.

The Rose Has Advantages

The population of gaming venues in Virginia is expanding, implying intensifying competition, but The Rose has some geographic advantages.

“Development is underpinned by limited competitive supply & attractive local demographics. MGM’s National Harbor is the only competitive property within a 60-minute drive of The Rose, and has an encatchment area mostly limited to the DC metro area,” added Stantial.

The analyst pointed out that The Rose could eventually generate better margins than the MGM property because of Virginia’s lower gaming taxes and competition in Fairfax County is unlikely to come to fruition.