CHDN Stock Study (7-27-23)

Posted by Mark on October 9, 2023 at 06:38 | Last modified: July 27, 2023 13:45

I recently did a stock study on Churchill Downs Inc. (CHDN) with a closing price of $131.58.

M* writes:

     > Churchill Downs Inc is a gaming entertainment, online wagering,
     > and racing company. It operates through three business segments:
     > Live and Historical Racing, TwinSpires, and Gaming. The Live and
     > Historical Racing segment includes live and historical pari-mutuel
     > racing. The TwinSpires segment includes the revenue and expenses
     > for online horse racing and the online and retail sports betting
     > and iGaming wagering business. The company generates more than
     > half of its revenue from the Gaming segment includes revenue from
     > casino properties and associated racetrack or jai alai facilities
     > which support the casino license as applicable.

Over the past decade, this medium-size company has grown sales and earnings at annualized rates of 7.4% and 20.6%. Lines are mostly up, straight, and narrowing except for sales dips in ’17 and ’20 along with EPS declines in ’14, ’19, and ’20. PTPM leads peer and industry averages while trending up from 11.0% in ’13 to 33.6% in ’22 with a last-5-year mean of 18.8%.

Also over the past decade, ROE is slightly better than peer and industry averages while trending up from 7.6% in ’13 to 69.7% in ’22 with a last-5-year mean of 40.8%. Debt-to-Capital is lower than peer and industry averages despite increasing from 34.4% in ’13 to 89.3% in ’22 with a last-5-year mean of 79.4%.

Interest Coverage is 5.0 and Quick Ratio is 0.7. Value Line assigns a B++ rating for Financial Strength.

With regard to sales growth:

• CNN Business projects 38.9% YOY and 29.1% per year for ’23 and ’22-’24, respectively (based on 6 analysts).
• YF projects YOY 39.8% and 16.8% for ’23 and ’24, respectively (7 analysts).
• Zacks projects YOY 40.2% and 17.3% for ’23 and ’24, respectively (6).
• Value Line projects 14.7% annualized growth from ’22-’27.
• CFRA projects 39.3% YOY and 27.3% per year for ’23 and ’22-’24, respectively (6).

I am forecasting below the range at 14.0% per year.

With regard to EPS growth:

• CNN Business projects 49.1% YOY and 34.2% per year for ’23 and ’22-’24, respectively (based on 6 analysts), along with 5-year annualized growth of 22.6%.
• MarketWatch projects annualized growth of 32.1% and 27.8% for ’22-’24 and ’22-’25, respectively (7 analysts).
• Nasdaq.com projects 20.5% YOY and 19.9% per year for ’24 and ’23-’25 (4, 6, and 4 analysts for ’23, ’24, and ’25).
• Seeking Alpha projects 4-year annualized growth of 10.3%.
• YF projects YOY 49.1% and 30.9% for ’23 and ’24, respectively (3), along with 5-year annualized growth of 30.0%.
• Zacks projects YOY 51.6% and 20.5% for ’23 and ’24, respectively (4), along with 5-year annualized growth of 10.3%.
• Value Line projects 16.5% annualized growth from ’22-’27.
• CFRA projects 2.3% YOY and 15.3% per year for ’23 and ’22-’24, respectively (4).

I am forecasting below the long-term-estimate range (mean of five: 17.9%) at 10.0% per year. I am using ’22 EPS of $5.71/share as the initial value rather than ’23 Q1 EPS of $7.20 (annualized).

My Forecast High P/E is 21.0. Over the past decade, high P/E ranges from 21.8 in ’22 to 41.3 in ’15 and ’21 (upside outlier of 644 in ’20 excluded). The last-5-year mean (excluding ’20) is 31.8 and the last-5-year-mean average P/E is 26.2. I am forecasting below the entire range.

My Forecast Low P/E is 15.0. Over the past decade, low P/E ranges from 15.1 in ’22 to 31.7 in ’14 (upside outlier of 160 in ’20 excluded) with a last-5-year mean of 20.5. I am projecting below the entire range.

My Low Stock Price Forecast (LSPF) of $85.70 is the default value based on $5.71/share initial value. This is 34.8% less than the previous close and 3.9% less than the 52-week low.

Over the past decade, Payoff Ratio ranges from 6.3% in ’22 to 38.0% in ’14 (excluding upside outlier of 189% in ’20) with a last-5-year mean of 46.9%. I am forecasting conservatively below the range at 6.0%.

These inputs land CHDN in the HOLD zone with a U/D ratio of 1.3. Total Annualized Return (TAR) is 8.3%.

PAR (using Forecast Average—not High—P/E) of 5.0% is less than the current yield on T-bills. If a healthy margin of safety (MOS) anchors this study, then I can proceed based on TAR instead.

To assess MOS, I compare my inputs with those of Member Sentiment (MS). Based on only 7 studies done in the past 90 days (five outliers including my own excluded), averages (lower of mean/median) for projected sales growth, projected EPS growth, Forecast High P/E, Forecast Low P/E, and Payout Ratio are 13.1%, 2.1%, 31.6, 20.3, and 44.1%. My growth rates are higher while my other three inputs are lower. Value Line projects a future average annual P/E of 27.0, which is higher than MS (26.0) and much higher than me (18.0).

MS high / low EPS is $7.99 / $6.82 vs. my $9.20 / $5.71 (per share). My high EPS is higher due to a higher growth rate. My TAR is significantly lower than MS 15.3% [average], however.

MS LSPF of $106.00 implies a Forecast Low P/E of 15.5 vs. the above-stated 20.3. MS LSPF is 23.4% less than the default $6.82/share * 20.3 = $138.45, which results in more conservative zoning. MS LSPF remains 23.7% greater than mine.

Something isn’t right with the MS studies because the default MS LSPF is invalid (higher than previous close) on today’s date. These studies were all done in the past two weeks as the stock has fallen less than 3.0%. The LSPF cushion should be 15-20% (and sometimes much more). I would also take issue with multiple MS studies (done on 2 separate days) that have identical inputs including EPS growth of 2.1%: unreasonably low, in my opinion.

I deem MOS in the current study to be robust based on the long-term EPS estimates and Value Line’s future average P/E. I can’t take MS into account for this comparison because the sample size (four not including the duplicates) is too low.

Valuation metrics are mixed for the stock. PEG is 2.1 (Zacks) or 1.7 (using my projected P/E). While this implies overvalued, Relative Value [(current P/E) / 5-year-mean average P/E] at 0.70 (M*) disagrees. Kim Butcher’s “quick and dirty DCF” prices the stock at 20 * [$12.30 – ($0.75 + $2.45)] = $182.00 thereby suggesting the stock to be undervalued by 28.0%.

I would look to re-evaluate CHDN under $112/share.