Over the past six months, Churchill Downs’s stock price fell to $74.86. Shareholders have lost 16% of their capital, which is disappointing considering the S&P 500 has climbed by 16.3%. This might have investors contemplating their next move.
Is there a buying opportunity in Churchill Downs, or does it present a risk to 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’re cautious about Churchill Downs. Here are three reasons why CHDN doesn’t excite us, plus one 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. Any business can put up a good quarter or two, but many enduring ones grow for years. Over the last five years, Churchill Downs grew its sales at a 15.5% compounded annual growth 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. Previous Growth Initiatives Haven’t Impressed
Growth gives us insight into a company’s long-term potential, but how capital-efficient was that growth? A company’s ROIC explains this by showing how much operating profit it makes compared to the money it has raised (debt and equity).
Churchill Downs historically did a mediocre job investing in profitable growth initiatives. Its five-year average ROIC was 8.8%, somewhat low compared to the best consumer discretionary companies that consistently pump out 65%+.
Final Judgment
Churchill Downs doesn’t pass our quality test. Following the recent decline, the stock trades at 10.6× forward P/E (or $74.86 per share). This valuation multiple is fair, but we don’t have much confidence in the company. There are better investments elsewhere. We’d suggest looking at a dominant aerospace business that has perfected its M&A strategy.
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