The Kentucky Derby is the world's most famous horse race. Most
people probably know that it's run the first Saturday in May at
Churchill Downs in Louisville, Ky.
But there is another popular race that still has a relatively
strong following, and it's coming this weekend. Starting tomorrow,
Churchill Downs hosts the Breeders' Cup World Championships - the
Super Bowl of thoroughbred racing.
The best horses from North America, Europe and even Japan will
compete for $25.5 million in purses in 14 races spread across two
days. Most of the attention is focused on the $5 million Breeders'
Cup Classic early Saturday evening, in which the remarkable
6-year-old mare Zenyatta is trying to finish out her perfect career
- Zenyatta is unbeaten in 20 starts.
***Horse racing hasn't had a superstar like Zenyatta take the
stage in a long time - some might say the sport's glory days ended
about the time Secretariat, whose story was just released in a
Walt Disney Co. (
movie, was still heading to the track.
Unfortunately for the sport people have too many activities
soaking up their spare time, and discretionary income isn't what it
used to be. Many tracks have closed in the past decade, and often
bettors have to get their kicks by wagering on simulcast racing
signals sent out by the few survivors.
But aside from the excitement surrounding Zenyatta's last race,
and the betting opportunities this weekend, there is another profit
opportunity to be found in horse racing.
Take the $624 million market cap company
Churchill Downs Inc. (Nasdaq: CHDN)
for instance. When it comes to a track record, no one can argue
with the company's longevity - the first Kentucky Derby was run at
Churchill's tracks in 1875.
The thinly traded stock went public in 1993. Now it pays a
dividend of 1.5 percent, and carries a P/E ratio of around 53. The
company owns tracks in Miami, Chicago and New Orleans, online
wagering services and other gambling-related businesses.
In the just-completed quarter, Churchill posted a $689,000 loss
- largely because of losses from discontinued operations. It
recently abandoned a foray into staging summer music festivals.
However, net revenue from continuing operations in the quarter grew
35 percent to $135.7 million, with net earnings improving to $3.7
The company has been making a number of strategic changes, and
things look to be improving. On Thursday, the day after reporting
results, the stock rose 3.6 percent.
***The company has had a checkered past. The Churchill Downs track
in Louisville is a palace for horse racing and can handle upwards
of 150,000 fans - around 100,000 are expected Saturday for the
Breeders' Cup. With that type of capacity, one would think there
are ample opportunities to use the space for events outside of
But the reality is that the facility mostly goes unused. When a
major renovation and expansion of the track was completed several
years ago, the company laid the groundwork for a possible casino on
its property - but that hasn't materialized. Churchill does have
casinos at its tracks in New Orleans and Miami, but ironically in
its home state the legislature has repeatedly shied away from
allowing struggling racetracks to open slots parlors or
Change comes slowly to the tradition-bound racing industry, and
Churchill's discontinued operations are evidence that if you build
it, they won't always come.
Instead, Kentucky has watched six of the eight surrounding
states that have or will have casinos take away potential tax
revenue. Ironically, the state has watched its racing industry
wither. In Ohio, where casinos are just being built, 5 of the 7
racetracks are now owned by major gaming companies in the hopes
that someday they'll expand slots or other gambling to those
***But Churchill has been making some interesting moves since
Robert Evans became CEO in 2006. The company is diversifying away
from its core racing business and expanding its gaming and online
business segments. It has acquired gambling-related businesses,
such as the YouBet wagering service, United Tote, and Calder
Casino. It also owns the BRIS racing and breeding data business,
and is co-owner of the HRTV cable channel.
The cumulative effects of these efforts led to a 35 percent
increase in net revenues from continuing operations in the last
quarter (year-over-year). Net earnings from continuing operations
improved to $3.7 million, or $0.22 per share, from a loss of $1.2
million, or $0.09 a share, a year ago.
Including discontinued operations, Churchill lost $4.4 million
in the quarter, or $0.04 cents a share. Still, that's far better
than a loss of $0.17 cents a share the year before and beat analyst
expectations that projected a loss of $0.09 cents per share.
***Churchill Downs has positioned itself for growth in the 21st
century that might have eluded it in the 20
. The company is growing beyond horse racing, and still has the
marketing draw of the Derby.
Several analysts who follow Churchill have 12-month price
targets of around $50 on the stock, implying around 38 percent
dividend paying small cap stocks
dividend paying small cap stocks