February 28, 2023 - 11:37pm EST by
2023 2024
Price: 246.00 EPS 13.5 17.50
Shares Out. (in M): 38 P/E 18 14
Market Cap (in $M): 9,400 P/FCF 0 0
Net Debt (in $M): 4,800 EBIT 0 0
TEV (in $M): 14,200 TEV/EBIT 0 0

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Note: this was my application idea and all data was up to date as of 2/17. The company subsequently reported Q4 earnings on 2/22. There were no major surprises, though 48% EBITDA margins for the acquired Virginia properties in two months of ownership was impressive and a little above what I’d assumed.

Churchill Downs (CHDN) has never been written up on VIC despite being run by an aligned management team that has created a tremendous amount of shareholder value over the last 8.5+ years. CEO Bill Carstanjen has been CEO since August 2014 after previously serving in various C-level roles at the company since 2005. Carstanjen owns $168 million of stock and is still only 55 years old. Bill Mudd (51) has been President and COO since September 2015 after joining CHDN as CFO in 2007. Mudd owns $80 million of stock. CFO Marcia Dall has been in place since October 2015 and owns $16 million of stock. Since 8/1/2014, CHDN has generated a total return CAGR of 28.9% vs. S&P 500’s 11.3% (that’s 777% total return vs. 149%). They did not generate this return by riding any particular industry wave, rather, management has proven adept at acquiring and divesting assets opportunistically, expending capital on newbuild projects at oftentimes very short payback periods, and buying back shares. Management is incredibly long-term focused and does not provide quarterly or annual guidance.


CHDN currently trades at $246, for a market cap of $9.4 billion and an EV (including their share of debt held at the JV level) of $14.2 billion. P/E on my 2023 and 2024 estimates is 18x and 14x. Net leverage on my 2023 and 2024 EBITDA is 4.1x and 3.5x. When thinking about the P/E, keep in mind that debt is elevated due to a recent $2.75 billion acquisition. As debt comes down, earnings will inflect higher – they are currently paying almost $4.50 per share of after-tax interest expense. This is of course not going to zero anytime soon but is helpful when thinking about normalized earnings power over time (well north of $20/share).

CHDN overview

Churchill Downs reports in 3 segments – Live and Historical Racing (LHR), Gaming, and TwinSpires. The segment reporting is not particularly helpful as LHR mixes Churchill Downs Racetrack/Kentucky Derby with their Kentucky, Virginia, and New Hampshire Historical Racing Machine (HRM) business. Gaming includes fully owned regional casinos as well as their JV interests in Rivers Des Plaines (61.3% ownership) and Miami Valley Gaming (50%). The JV EBITDA flows through into the Gaming segment while revenue does not, making the Gaming segment margins not apples to apples with other pure play regional gaming operators.

A lazy analysis of CHDN will present the company as the owners of the trophy asset Kentucky Derby and a somewhat random mix of semi-commodity regional gaming assets, with a high margin and industry-leading horse betting app thrown in for good measure. A somewhat more sophisticated analysis would recognize that a handful of the regional properties are much better than others and adjust multiples accordingly. What I think these approaches miss is the increasing interplay between the segments and management’s ability to use certain assets to extract value from the rest of the portfolio (just one example: offering bets on horse races requires an agreement with the track, so CHDN can use their critical Kentucky Derby content to win sponsorship dollars from FanDuel and create a white label version of TwinSpires for Draftkings). CHDN management are absolute masters of the legislative process – they come in to lobby states as the guys that are based in Louisville and own the Kentucky Derby, not the greasy-haired guys from LV trying to score another regional casino license. Doors open for CHDN that do not open for others.

At a high level, my estimated 2023 EBITDA split is roughly 8% Churchill Downs Racetrack/KY Derby, 33% HRM in KY/VA/NH, 47% Gaming, and 12% TwinSpires. In future years this should continue mixing towards HRM as VA expands and they build out a new facility in NH. 

Kentucky Derby

The most exciting two minutes in sports is the culmination of a 3-4 day spectacle in early May. Not unlike an F-1 race or the Super Bowl, it is more of a cultural event and a party for wealthy attendees than a sporting event. CHDN monetizes the Derby primarily through multi-day ticket packages which make up 55-60% of Derby Week revenue. Wagering revenue makes up another 25-30% (both on-site and through their and others’ online betting platforms, where they get a cut of handle), and the remaining 15-20% is a combination of sponsorship (Brown-Forman’s Woodford Reserve, Longines, BMW, Ford, White Claw, Williams Sonoma are key partners) and broadcasting revenue. Consistent with all other sports rights, CHDN should see a nice step-up in broadcasting revenue when the NBC agreement expires in 2025.

Attendance for the Derby typically runs at about 150k, depending on weather. ~60k seats are considered premium and drive the vast majority of ticketing revenue (some of these are $10k+). General Admission tickets to the infield, with limited/no view of the track, cost $67-$100 for 2023. These are mainly young people there for the party that lack the ability or desire to spend $500+ on a reserved, all-inclusive ticket. As these consumers age up and earn higher income they can serve as a pool of future premium ticket demand. Additionally, I expect CHDN to continue building out reserved seating options around the track to further price segment these ~90k attendees.

Over 1/3 of reserved seats are held under Personal Seat Licenses (PSLs) w/ 3-7 year expirations. I believe there are a number of other PSLs that were struck long ago that will begin rolling off and will be re-priced at much more favorable rates.

They don’t disclose Derby Week revenue, but looking at segment results historically in Q2, we can triangulate that Derby generates about $150-160 million of revenue and ~$100 million of EBITDA (65% margins). CHDN highlighted that 2022 adj. EBITDA from Derby Week grew ~$10 million vs. 2019. 2020’s race was run without fans and 2021’s had significantly limited capacity, so there is still likely some pent-up demand. Going forward, I believe CHDN has the ability to raise ticket prices at a sustainable 5%+ rate. There is arguably even more latent pricing power, but management is thoughtful about making sure guests receive a better experience each year and don’t feel as if they’re being taken advantage of. There are also two ongoing projects that will result in additional tickets sold and other existing tickets going up in price.

The First Turn Experience section creates an incremental 3,700 premium seats and will result in a significant ticket price uplift for 3,400 other seats and will be ready for the 2023 Derby. Reserved First Turn seats start at $1,261 for 2023 and Dining Room tickets for First Turn are $2,610. If I assume avg. incremental revenue is $750 vs. the 3,400 seats that were there previously, and $1,500 avg. on the 3,700 new seats, you get $8.1 million of incremental revenue. At 80% margins this is $6.5 million of EBITDA and they spent $90 million to build it. Not an amazing payback but I’d note they have a history of pricing new sections low to generate initial demand and create loyalty over time. Management confirmed this to me after Q4 and also noted they will sell PSLs on these seats in future years.

The second major project at the track is the Paddock renovation. They are spending $185-200 million on this and stating it’s an under 8 year payback. Based on what’s disclosed (net add of 1,400 premium seats, upgrading 3,700 existing premium seats) I have a difficult time backing into the payback math. However, management has said that some of these seats will be priced very highly (e.g. $5-10k potentially) and I have a suspicion that they are going to use the completion of this project, which aligns with the 150th running of the Derby in 2024, to significantly reset prices on ALL tickets by 10-15%.

HRMs - Kentucky

A Historical Racing Machine is essentially a class 2/class 3 slot machine where the game math is driven by the results of a past horse race instead of by a random number generator. This is really a great example of trickeration that allows the politically powerful horse racing/breeding industry to receive more subsidies while allowing legislators to say with a semi-straight face that they are not expanding gaming in their state (because it’s just a different form of horse racing). The argument stood up to KY Supreme Court scrutiny and has expanded to other markets like VA, NH, LA and WY. Others are sure to follow and CHDN seems to be actively lobbying for it.

CHDN’s first foray into HRMs was with the opening of Derby City Gaming in Louisville in September 2018. This property already does more each year in EBITDA ($100+ million) than it cost to originally build ($78 million). Derby City operated 974 machines that generated $518 of win per day in December. They are currently expanding the floor and adding a hotel at a cost of $80 million. Note that win per day at Derby City has continued growing despite construction disruption from these additions. I will let the reader do the ROI math on what this property is worth based on an arguably conservative 10-12x EBITDA multiple. It is a quasi-gaming monopoly on a metro area with 1.4 million residents.

Their next HRM facility was built at Oak Grove, which is across the road from Fort Campbell and 55 miles north of Nashville. The facility opened in September 2020 and cost $200 million total. This has not been the grand slam that Derby City was, but I believe the property is doing roughly $55 million of EBITDA for 2022. In December they operated 1,262 machines that generated win per day of $306. Oak Grove is aiming to split the drive-from Nashville market with Kentucky Downs, another track that opened their HRM facility in June 2018 and did $387 in win per day on 1,040 machines in December. Kentucky Downs is owned by Ron Winchell and Marc Falcone (formerly CFO of Fertitta Entertainment and Red Rocks Resorts).

CHDN’s third large HRM facility in the state opened a few months ago at Turfway Park, near the Cincinnati airport. They also spent around $200 million here. There are a number of competitors across the border in Ohio, but a sizable portion of the metro population lives on the KY side and it is a hassle to cross the bridge and deal with Cincy traffic. I expect the property will pick off their fair share of customers over time. It’s worth noting that Derby City Gaming competes with a full-blown casino across the river in Indiana but has still been tremendously successful.

There are a few other properties they own that are either open (Newport gaming annex facility near Cincy, Ellis Park) or being built (Derby City Gaming Downtown annex in Louisville, Owensboro facility that is an annex for Ellis Park but will be larger).

The Kentucky Horse Racing Commission, as the regulator of HRMs, designed the licenses to create local gaming monopolies around the state’s horse tracks. Each track can host HRMs on-site and can have one annex facility attached to it within 60 miles, but you cannot put a facility within I believe 60 miles of a competitor either. This is incredibly valuable as KY does not have other forms of legalized gambling except lottery.

The bear case for CHDN’s KY assets is that they are overearning given a below-average tax rate (1.5% on handle, or ~17% on GGR given a ~9% win rate) that could be corrected by some future state legislature. CHDN counters that their effective tax rate, when factoring in contractual purse contributions to the horsemen in the state, is actually ~32% (see:

Why am I not worried about the tax rate increasing? To put it bluntly, CHDN has the legislature in KY in their back pocket. They all attend the Derby, which is the crown jewel of the entire state on a national and global level. Few individual legislators have an incentive to anger them. Second, they are putting a serious amount of investment and cold hard cash into the horse breeding industry in the state (they actually call it “agriculture” there). Horse breeders are generally wealthy and very well connected politically, and they are extremely happy to have nicer racing facilities and larger race fields, which attract more betting dollars that they get a % of. So there is no catalyst for this equilibrium to change.

All of their KY properties are still either ramping up or being built, but for 2024 I am modeling over $725 million of revenue and over $320 million of EBITDA. At a 12x multiple this would cover 27% of CHDN’s current EV.

HRMs – VA and NH

On 10/1/2022, CHDN closed on the acquisition of six HRM facilities in VA with 2,700 machines and two other casinos in NY and IA for $2.75 billion. Peninsula Pacific Entertainment (P2E) was the seller and had less scale and expertise as a gaming operator than CHDN. The company secured the debt financing for the deal early, in April 2022, thus avoiding the worst of the interest rate increases that followed. On top of what they acquired, CHDN will be allowed to build 4 additional HRM facilities in VA, and subject to running 50 race days at Colonial Downs track, can install up to 5,000 machines over time across the 10 locations. Management expects to receive approval for more than 5,000 whenever they decide to approach the regulator about changing the limit.

With 4 new commercial casinos under construction in the state (no other existing casinos), VA will be a more competitive market than KY is. However, VA is also significantly wealthier and has almost double the population of KY. CHDN’s Dumfries project ($400 million spend, ~1,000 machines) will also tap into the Washington D.C. market. Excluding tax benefits, and including some additional project capex CHDN will be doing, they paid under 9x synergized EBITDA. There was growing concern mid-to-late 2022 that CHDN had overpaid, given the deal was announced in a different market in February 2022. However, I think this will turn out to be an incredible acquisition.

Not reflected in the multiple above is CHDN’s pending $250 million acquisition of Exacta Systems. Exacta is one of two providers of central determinant systems for HRMs (the other is Ainsworth). We know from P2E’s financials that they paid Exacta roughly 12% of HRM revenue for the 9 months ending 9/30/2022. Management has suggested that this rate is double what they pay Ainsworth in KY. So CHDN will be able to improve margins at the VA properties by 500-600bps by vertically integrating this supplier (~$20 million EBITDA uplift on 2022 VA revenue base, higher in future years given increased revenue). Additionally, P2E’s use of Exacta’s CDS largely precluded them from offering Aristocrat games, which were only available with the Ainsworth system. Aristocrat titles are typically the best performing on any gaming floor and drive traffic by themselves. Despite not having these, avg. win per day across the VA properties in December was $393. By comparison, December win per day across all of Kentucky was $295.

In New Hampshire, CHDN acquired the license for Chasers card room in Salem in September 2022. This is ~30 minutes from Boston and CHDN plans to spend up to $150 million total on the initial acquisition and building a new facility. Not much is known about the market or their specific plans – there is some sort of landlord dispute that has delayed the construction start of a new facility – but CHDN management has mentioned that this could be their best performing property. They really believe the acquisition was a coup. One notable difference from KY and VA is they will be able to offer table games here in addition to HRMs. Time will tell but they expect to have the full facility up and running by mid-2024.


Online horse betting has been legal for far longer than sports betting, and it’s been legal at a national level instead of state-by-state. The result is that the market is already fully consolidated and rational, with CHDN’s TwinSpires website and app having roughly 30% market share of online. Online share as a % of total handle is now ~53%, up from 40% in 2019 after many off-track betting facilities did not remain open or saw customers migrate online. Revenue in 2021 for TwinSpires segment was $457.8 million and Adj. EBITDA was $82.7 million (18%). 2022 came in at $441.6 million and $114.1 million (26%).

Note that in 2021 and part of 2022, CHDN was incurring significant startup/marketing costs related to online sports betting in TwinSpires. They decided to exit this market in late February 2022 and instead are monetizing their market access in different states. EBITDA from sports betting/igaming went from -$41 million in 2021 to -$1 million in 2022. They have now also partnered with Fanduel and Draftkings to monetize more of their horse betting data rights and produce white label versions of TwinSpires’ app. There will likely be some cannibalization from core TwinSpires from these arrangements, but generally the dedicated horse betters want an app with more historical race/horse data and features than the sports betting platforms will offer. These partnerships should grow EBITDA to CHDN overall and likely get more casual sports fans interested in horse betting and potentially attending the Derby.

Sports betting is not currently legal in KY, but I expect this will happen in the next 2-3 years. As the legislative favorite, with the biggest gaming footprint, CHDN will manage to extract their fair share even without directly operating an app. This could take multiple forms such as a skin arrangement or potentially an in-person signup requirement, favoring CHDN’s locations in/near Louisville and the Cincy metro area.

Other Gaming assets

CHDN fully owns or holds 50%+ stakes in regional casinos in ten states. By industry standards, they are considered strong operators and try to target properties with limited/stable competitive environments. Arguably three of their properties matter more than the others combined – Rivers Des Plaines in the Chicago suburbs (near O’Hare airport), Miami Valley Gaming in Ohio, and a greenfield property in Terre Haute, Indiana that they are spending up to $290 million on.

Rivers is jointly owned with developer Neil Bluhm, with CHDN owning 61.3%. Assuming that the JV EBITDA split is similar to the reported GGR share between Rivers and Miami Valley, the property did ~$215 million of EBITDA in 2021 before an expansion took the number of gaming positions up by more than 50%. They’ve had a hard time staffing up since the expansion, but this is one of the best regional casinos in the U.S. Some fear that a new temporary (and eventually permanent) casino just opened in Waukegan by FLL will draw traffic from Rivers. However this is a 31 mile drive from Rivers in traffic that is often horrible. Similarly, a downtown Chicago casino being built by BALY will be roughly 16 miles away in even worse traffic. My sense is both of these facilities, if actually built, will suffer from a winner’s curse. CHDN and Bluhm pulled out of bidding for the Waukegan license b/c they believe another casino will get approved in Kenosha, WI. For the downtown casino, BALY promised the world to the labor unions and won the license. It’s unlikely that either will have a ton of spare marketing dollars lying around to pull gamblers from Rivers.

Miami Valley is a 50/50 JV with Delaware North, near Dayton, OH. The property now has 2,250 VLTs after opening minor expansions in June and July 2022. GGR growth here in January 2023 was 25% after growing ~5.5% in 2022. EBITDA in 2022 is probably around $100 million.

The casino in Terre Haute is currently scheduled to open in early 2024. There have been a few cost overruns and they now expect to spend up to $290 million in total on the development. This is not an incredible use of capital but still highly accretive as I expect the property to do $45-50 million of EBITDA once up and running.

Their remaining eight regional casinos are mostly low/no growth assets that in total did ~$235 million of EBITDA in 2021. Any of these could be quickly monetized via sale to another operator and/or REIT if desired.

Capital allocation

A fundamental question is what will CHDN look like, and what multiple should it get, once we’re past the current capex cycle? I have been impressed with how entrepreneurial this management team is. The CEO rarely meets with investors, and my sense is that he is constantly scanning the chess board of U.S. gaming opportunities and talking to states about how CHDN can “help” with budget issues or with growing the state’s horse racing industry. So I have little doubt that there will be other licenses won, or other states implementing HRMs, or something we can’t even fathom at this point, that we’re talking about 2-3 years from now as a growth opportunity.

Even without future growth projects, there is still growth in 2024/2025 and beyond. Arguably none of their KY properties are mature yet. Derby City opened in 2018 and still grew 10.1% in 2022 (off a crazy +94% 2021 stimulus comp). Rivers is still working through labor issues to grow into their expansion from last year. The VA properties will take 3-5 years to go from 2,700 machines to 5,000 total (and management thinks there is capacity for more than 5,000 over time). The Derby will continue to grow revenue 5%+ annually (and EBITDA faster), and there are other operators (BetMGM, CZR) to sign up for TwinSpires partnerships.

The IR deck highlights they have bought back 16.2 million shares at an avg. price of $89 over the last 7 years. CHDN bought Big Fish Games and then sold it ~3 years later for $155 million more than they paid. They have sold $515 million worth of excess land since 2016 and still have another $30-40 million in FL around Calder Casino that they could sell. A large chunk of the buybacks (~$500 million) has come in privately negotiated transactions with the Duchossois family who sold them Arlington Park in 2000.


I believe the business can earn over $20 a share in 2025, based on the assets and project pipeline they have today. If investors start looking to this 1-1.5 years from now and place a 15x multiple on it, you have a ~22% return from here. But, I think the pricing power of the Derby and the sustained growth of the KY and VA assets in particular will support a multiple above 15x. You will also have a NH facility (that management thinks could be one of their best assets) that has only been open for ~6 months at year-end 2024 and an Indiana casino only in its second year of operation. Then, we have a great management team hunting for more value-creating growth opportunities. It’s not unrealistic to believe this sustains an 18-20x multiple and shares are trading closer to $400 sometime in 2024 or 2025. A 15x EBITDA multiple on my 2024 numbers also translates to $404 per share of equity value.


I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.


- Continued strong capital allocation
- Absorbing P2E acquisition and improving margins
- Inflection in FCF as growth capex cycle ends

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