With horse racing’s Triple Crown just wrapped up over the weekend, is it time to buy Churchill Downs with the expectation of an earnings bump? Not so much. Rarely is a stock totally untradeable but it looks that way with Churchill Downs. It’s a shame because the company itself is quite well run, except for its debt load.
First the good news. The trend that Churchill has been following for the last 3 years, taking focus away from racing and towards casino and games is continuing and the company is turning itself into a primarily casino/online gaming company rather than primarily a horseracing outfit. Casino gross margins went up from 40.7% to 41.8% year over last quarter, and this after only averaging about 26% from 2012 to 2015. Casino plus Big Fish Games now account for over 72% of revenues. Essentially, Churchill is only really a racing company for one quarter a year. Other than that they lose money every quarter on horseracing proper. TwinSpires, basically online horseracing, helps the horseracing segment as a whole break even and even made a small profit of $5.4 million last quarter. The path to growth in an old segment, once again, is going digital and especially mobile, as we’ve seen again and again with the failures and successes of various UK bookies.
That said, one potential shot in the arm for Churchill Downs and other mobile gamers would be Google Android supporting gambling apps on their phones so users can take advantage of TwinSpires mobile. Right now it’s only available on iPhones but if Alphabet ever changes its policy it could be big for Churchill. TwinSpires has been doing very well even without Android, with handle up 10.6% in the first quarter after being up 11% in the fourth quarter. As discussed in their last earnings call, the industry was up 3.1% so TwinSpires is growing faster than competition by 7.5 points.
In the meantime, the company keeps slowly expanding its casino and Big Fish operations. $25 million is being sunk into a hotel in Maine, a big expenditure for a company like this. Big Fish expenses revolve around user acquisition, a highly statistically-driven enterprise that costs a lot at first for a big return later. When a user is first acquired through marketing spend, it can take years for the ROI to establish itself as the user plays games. Once the cost of a new acquisition outweighs average user value, the campaign is stopped and moved on to another promising game that needs more users.