With the Kentucky Derby just days away, Churchill Downs is in a bit of a rut. Not the storied Louisville race track: Churchill Downs the stock.
Shares in the venue where the 142nd Kentucky Derby will be held Saturday have plunged 12 percent in five days, extending the worst start since 2009 after posting gains in 16 of the last 18 quarters. Concern about an acquisition – a video game maker called Big Fish Games – is denting a run that put the shares in the top 15 percent of peers since 2009.
It’s a rare stumble for a company that has been an exemplar of adaptation, raising revenue every year since 2008 through acquisitions that countered an 11 percent decline in U.S. horse-racing attendance. Worth more than $2 billion, Churchill towers over other publicly traded track operators such as Dover Downs Gaming & Entertainment Inc. and Canterbury Park Holding Corp. – though the value is $300 million lighter after this week.
“The recent pullback in the stock is investors still getting comfortable with the Big Fish business and its prospects,” said Adam Trivison, an analyst at Gabelli & Co.
Established 144 years ago and site of the longest continuously running sporting event in the country, Churchill Downs was founded by Meriwether Lewis Clark, the grandson of American explorer William Clark, according to its website. The company transferred to the Nasdaq Small-Cap Market 23 years ago after two decades of over-the-counter “pink sheets” trading, opening on March 29, 1993, at a price of $30.50.
Shares added to an all-time high the day after last year’s Derby, starting a six-month run of 20 percent. They closed Tuesday at $128.47, the lowest since Feb. 11.
While first-quarter sales at Churchill surpassed analyst forecasts, investors got antsy after one measure of earnings came in light and profits at Big Fish were by some measures half of what was expected. The stock’s five-day drop is its biggest since November 2009.
Acquisitions have helped Churchill Downs diversify beyond its roots since the 1990s when it was a pure-play racing operation – and the namesake track its biggest-earning venue. Revenue from that division shrank to about 20 percent last year, while mobile gaming and casino gambling ballooned to more than 60 percent.
While there’s a nostalgia for some investors who look to Churchill Downs as a way to wager on the Derby, “it’s not a pure play anymore,” said Trivison, and “that’s probably good.” Revenue in 2015 rose to $1.2 billion from $812 million a year earlier, boosted by the Big Fish contribution.
Other racetrack operators have ventured into gambling, but their stocks haven’t fared so well. Dover Downs and Canterbury Park have both tumbled at least 20 percent since the end of 2011. And even amid Churchill Downs’ stumbles transitioning into the realm of free-to-play gaming, it still has outpaced competitors in that industry. Zynga Inc. and Activision Blizzard Inc. have both slumped at least 11 percent year-to-date.
For investors willing to gamble that Churchill Downs will overcome a bumpy ride for Big Fish, the stock may be attractive from a valuation perspective. It’s trading at a discount of about 8.5 percent to its 10-year average on a price-earnings basis.
Meanwhile, American Pharoah’s 2015 reign as the first Triple Crown winner in 37 years, could mean fresh horse-racing fans tune into Saturday’s race – an event which averaged 16 million viewers last year, according to data from Nielsen.
“The Kentucky Derby is an ultra-valuable asset,” Trivison said. “The underlying value of the Derby and some of the assets excluding Big Fish are doing better than ever