Churchill Downs (NASDAQ:CHDN) stock is joining other gaming equities to the upside Friday. That’s after Jefferies analyst David Katz upgraded shares of the racetrack operator less than two weeks after the Kentucky Derby.
The analyst lifted his rating on the gaming company to “buy” from “neutral,” while noting Churchill is one of the best growth stories in the industries, and that the stock’s recent weakness is detached from sound fundamentals. Like other gaming equities, Churchill recently fell out of favor with investors, shedding 12.43 percent over the past month and 23.32 percent from its March highs. Katz sees a bright path ahead.
We are upgrading CHDN because fundamentals and unique growth pipeline are intact, despite the decline from 3/15/21 peak (-23%), which in our view is driven by technical factors,” said the analyst in a note to clients. “We believe the growth drivers in historical racing machines in Kentucky, regional properties in Illinois, the Kentucky Derby and prospectively digital gaming, remain intact, generating 19% earnings before interest, taxes, depreciation and amortization (EBITDA) compound annual growth rate (CAGR) at significantly discounted levels at 12.4X ’22 EBITDA.”
The analyst tags Churchill stock with a $244 price target, implying upside of 28 percent from the May 13 close.
Churchill Stock Digital Opportunity
While the gaming company is often viewed as the operator of its historic namesake track in Kentucky and land-based casinos, Katz believes iGaming growth is there for the taking.
Churchill’s TwinSpires platform is posting solid results, with first-quarter EBITDA jumping 39 percent. The Jefferies analyst sees TwinSpires growing “gradually and profitably” — the latter of which is the pivotal trait, because investors are displaying little tolerance for internet gaming operations that aren’t profitable. Katz believes the Churchill unit will command two percent of a $37 billion US iGaming and online sports betting industry by 2025.
“We believe the bull case remains intact long-term, while the current pressure is likely temporary over the next few weeks, thereby creating a buying opportunity,” said the analyst.
Katz sees continued growth from the Kentucky operations, as well as Churchill’s regional casinos and Illinois expansion plans. Illinois is one of the largest regional gaming markets in the country. TwinSpires debuted in Colorado, Indiana, and Pennsylvania last month.
Interesting Contributor to Sell Off
Churchill stock is tracking rivals lower in recent weeks. But the reason for that may have more to do with an index change than it is a negative commentary on the shares.
“We believe much of the recent weakness is largely driven by the shift to the Russell 1000 from the Russell 2000,” notes Katz. “We estimate the index shift could leave ~3.5M [shares] of selling pressure through the 6/25 rebalancing. We consider the weakness a compelling opportunity with considerable upside.”
In simple terms, Churchill stock got an index promotion. But it will be a smaller percentage of the Russelll 1000 than it was in the Russell 2000. That means selling by fund managers is occurring to align with the name’s expected slice of the index it’s moving into.
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