Racing, gaming, and entertainment company Churchill Downs (NASDAQ:CHDN) met Wall Street’s revenue expectations in Q3 CY2024, with sales up 9.8% year on year to $628.5 million. Its non-GAAP profit of $0.97 per share was 7.9% below analysts’ consensus estimates.

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Company Overview

Famous for hosting the Kentucky Derby, Churchill Downs (NASDAQ:CHDN) operates a horse racing, online wagering, and gaming entertainment business in the United States.

Gaming Solutions

Gaming solution companies operate in a dynamic and evolving market, and the digital transformation of the gaming industry presents significant opportunities for innovation and growth, whether it be immersive slot machine terminals or mobile sports betting. However, the gaming solution industry is not without its challenges. Regulatory compliance is a crucial consideration as companies must navigate a complex and often fragmented regulatory landscape across different jurisdictions. Changes in regulations can impact product offerings, operational practices, and market access, requiring companies to maintain flexibility and adaptability in their business strategies. Additionally, the competitive nature of the industry necessitates continuous investment in research and development to stay ahead of competitors and meet evolving consumer demands.

Sales Growth

A company’s long-term performance can give signals about its business quality. Even a bad business can shine for one or two quarters, but a top-tier one grows for years. Luckily, Churchill Downs’s sales grew at a decent 16.1% compounded annual growth rate over the last five years. This shows it was successful in expanding, a useful starting point for our analysis.

Long-term growth is the most important, but within consumer discretionary, product cycles are short and revenue can be hit-driven due to rapidly changing trends and consumer preferences. Churchill Downs’s annualized revenue growth of 25.6% over the last two years is above its five-year trend, suggesting its demand recently accelerated.

We can dig further into the company’s revenue dynamics by analyzing its three most important segments: Horse Racing, Gaming, and TwinSpires, which are 40.2%, 43%, and 18.9% of revenue. Over the last two years, Churchill Downs’s revenues in all three segments increased. Its Horse Racing revenue (live and historical) averaged year-on-year growth of 63.6% while its Gaming (casino games) and TwinSpires (horse racing subsidiary) revenues averaged 19.5% and 4.3%.

This quarter, Churchill Downs grew its revenue by 9.8% year on year, and its $628.5 million of revenue was in line with Wall Street’s estimates.

Looking ahead, sell-side analysts expect revenue to grow 11.2% over the next 12 months, a deceleration versus the last two years. This projection doesn't excite us and indicates the market believes its products and services will see some demand headwinds.

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Cash Is King

Although earnings are undoubtedly valuable for assessing company performance, we believe cash is king because you can’t use accounting profits to pay the bills.

Churchill Downs broke even from a free cash flow perspective over the last two years, giving the company limited opportunities to return capital to shareholders. The divergence from its good operating margin stems from its capital-intensive business model, which requires Churchill Downs to make large cash investments in working capital and capital expenditures.

The company’s cash burn increased from $89.5 million of lost cash in the same quarter last year.

Key Takeaways from Churchill Downs’s Q3 Results

Although revenue beat by a small amount, EBITDA and EPS both missed expectations. Overall, this quarter could have been better. The stock remained flat at $134.13 immediately after reporting.

Churchill Downs’s latest earnings report disappointed. One quarter doesn’t define a company’s quality, so let’s explore whether the stock is a buy at the current price. When making that decision, it’s important to consider its valuation, business qualities, as well as what has happened in the latest quarter. We cover that in our actionable full research report which you can read here, it’s free.