Over the past six months, Churchill Downs’s shares (currently trading at $88.03) have posted a disappointing 8.4% loss while the S&P 500 was flat. This was partly due to its softer quarterly results and might have investors contemplating their next move.
Is now the time to buy Churchill Downs, or should you be careful about including it in your portfolio? Dive into our full research report to see our analyst team’s opinion, it’s free.
Why Do We Think Churchill Downs Will Underperform?
Despite the more favorable entry price, we don't have much confidence in Churchill Downs. Here are three reasons you should be careful with CHDN and a stock we'd rather own.
1. Long-Term Revenue Growth Disappoints
A company’s long-term sales performance is one signal of its overall quality. Even a bad business can shine for one or two quarters, but a top-tier one grows for years. Over the last five years, Churchill Downs grew its sales at a 22.7% annual rate. Although this growth is acceptable on an absolute basis, it fell slightly short of our standards for the consumer discretionary sector, which enjoys a number of secular tailwinds.
2. Free Cash Flow Projections Disappoint
If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.
Over the next year, analysts’ consensus estimates show they’re expecting Churchill Downs’s free cash flow margin of 16.9% for the last 12 months to remain the same.
3. New Investments Bear Fruit as ROIC Jumps
A company’s ROIC, or return on invested capital, shows how much operating profit it makes compared to the money it has raised (debt and equity).
We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. On average, Churchill Downs’s ROIC increased by 1.8 percentage points annually each year over the last few years. This is a good sign, and we hope the company can continue improving.
Final Judgment
Churchill Downs doesn’t pass our quality test. After the recent drawdown, the stock trades at 13× forward P/E (or $88.03 per share). While this valuation is reasonable, we don’t see a big opportunity at the moment. There are better investments elsewhere. We’d suggest looking at our favorite semiconductor picks and shovels play.
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