The Kentucky Derby

Its Melbourne Cup week and as thoughts turn to betting and horse racing we thought its time to take a closer look at Churchill Downs (CHDN). CHDN owns the race course for the most exciting two minutes in sport the Kentucky Derby. The track is 2 kilometers long and is the longest running annual sporting event in the US run over 139 consecutive years. The race is also known as the run for the roses with a blanket of 564 red roses awarded to the winner each year.

The big board
Ever been that fan who spent the day at the races but never saw a horse? CHDN understands so they have installed what they call the Big Board for the 2014 race. In partnership with Panasonic CHDN has installed a 15,224 square foot high definition LED video board, the board will be 171 feet long and the structure 170 foot tall. The board and structure will weight over 1,000,000 pounds and is bigger than 3 NBA basketball courts or 2,200 46 inch flat screen TVs.

Sports not gambling

CHDN makes the majority of its revenue through premium ticket sales the largest contributor at 50% of revenue with the rest split between sponsorships, wagering and TV licensing. Unfortunately the rest of racing is not profitable CHDN typically makes a profit in the second quarter when the Derby is run the rest of the year is relatively quiet and unprofitable.

The TV rights (with NBC) and sponsorship (Yum Brands) are up for grabs following the 2015 race and given the increased focus on live sports for advertising we believe CHDN is well positioned for improved terms. Both deals were renewed in 2011 and the Derby's popularity has increased since with 16.2m viewers this year up from 9% in 2012 and up 12% in 2011. The race is unique as it is the only annual sporting event that draws more female viewers than male at 52%. CHDN believes that the Derby is worth a lot more if it was valued as a sports rather than betting asset.

Regional casinos but some online

The problem is CHDN has been buying regional casinos with racing now only contributing 34% of revenue compared to 69% in 2009. Because of these diversification efforts CHDN has been valued more as a regional gaming asset than a unique sporting event. CHDN also has an interesting online wagering business which is 20% of revenue the site TwinSpire.com is a leader in the market with 42% US marketshare. While online growth is slow, the recent quarter showed 7.3% growth this compared favourably to overall industry growth of 1.3%. Wagering was already declining and the financial crisis has added to industry woes with wagers down 20% from the peak in 2008.

CHDN will conduct the 140th running of the Kentucky Derby on the 3rd of May 2014. Giddy up!

Jason

http://www.decisiveassetmanagement.com/

Disclosure: Decisive has no long position in Churchhill Downs (CHDN) stock 

The material in this article is for informational purposes only and in no way constitutes a solicitation of business or investment advice. The material has been prepared without regard to any client's or other person's investment objectives. Before making an investment decision you should consider the assistance of a financial adviser and whether any investment or service is appropriate in light of your particular investment needs.