Churchill Downs Named Top Risk-Reward Idea Among Gaming Stocks

Posted on: March 29, 2025, 07:17h. 

Last updated on: March 29, 2025, 07:17h.

Todd Shriber @etfgodfather Read More
Expertise: Financial, Gaming Business, Mergers and Acquisitions.
  • Stock has slumped this year
  • Investments at Kentucky racetrack could pay dividends

As confirmed by 16.71% year-to-date decline, Churchill Downs (NASDAQ: CHDN) is following other gaming stocks to the downside since the start of 2025 – the result of tepid consumer sentiment and speculation that the US economy is heading for a recession.

Churchill Downs
Mystik Dan winning the Kentucky Derby in May. An analyst says the stock is one of the best ideas in the gaming industry. (Image: ESPN)

To be sure, those are relevant issues to the consumer discretionary sector, including gaming equities, but some analysts believe the racetrack operator merits consideration. Following a recent visit to the iconic Kentucky track, Jefferies analyst David Katz reiterated a “buy” rating on Churchill Downs with a price target of $162, implying upside of nearly 46% from Friday’s closing price of $111.23.

We believe leverage is a key risk element for Churchill Downs, which remains the prominent sector growth story and best risk-reward,” observed the analyst.

The gaming company’s leverage ratio is 4x cash flow, but management is comfortable with that for the time being and it’s likely to be driven lower over the long-term. Among the signs that management views that ratio as not burdensome is the expansion of a share repurchase plan announced earlier this month. Churchill Downs told investors it’s adding $374.4 million to a buyback plan announced in 2021.

Churchill Downs Derby Investments Could Pay Off

In February, Churchill Downs announced a multi-year spending program that could see it shell out up to $900 million to expand and renovate its namesake racetrack in an effort to lure more visitors to the Kentucky Derby.

The operator said it could spend $350 million to $400 million of that sum this year in the hopes of having some of the enhancements ready for 2026 Derby. That spending cycle is likely to be finalized in late 2027 or early 2028 because the operator wants the new seating and other amenities ready in advance of 2028 edition of the first leg of the Triple Crown. Katz said the spending is above-average relative to the operator’s history, but it could pay off over the long-term.

“While the magnitude is larger than past investments, the demand for more and better seating, coupled with the high ceiling on pricing, suggest the projects should generate strong returns,” noted the analyst.

While in Louisville, Katz and his team also toured Churchill’s Derby City historical horse racing (HHR) facility, which is off to a slow start following its 2024 opening. Executives from the gaming company told the Jefferies analyst that they’re accelerating marketing efforts for that venue and they’re confident the property will be a long-term winner.

Churchill Downs ‘Strong Opportunity’ in Weak Space

There’s mounting evidence that the current macroeconomic environment is acting as a headwind to gaming equities, particularly operators of land-based gaming venues. However, Katz described Churchill Downs as a “strong opportunity” is a weak space.

That doesn’t imply the operator is entirely insolated from a recession or that it’s immune from share price weakness if the broader gaming complex declines, but it could signal that when the space rebounds, Churchill Downs will be a leader.

“The balance between capturing opportunistic growth and reaping the cash flow from ramping projects from the past few years to reduce leverage in an uncertain economy remains a debate that we believe weighs on the shares, with our leaning toward lower leverage,” concludes the analyst.