3 Reasons CHDN is Risky and 1 Stock to Buy Instead

Churchill Downs’s stock price has taken a beating over the past six months, shedding 23.4% of its value and falling to $89.90 per share. This may have investors wondering how to approach the situation.

Is now the time to buy Churchill Downs, or should you be careful about including it in your portfolio? Check out our in-depth research report to see what our analysts have to say, it’s free.

Why Do We Think Churchill Downs Will Underperform?

Even with the cheaper entry price, we’re sitting this one out for now. Here are three reasons why CHDN doesn’t excite us, plus one stock we’d rather own.

1. Long-Term Revenue Growth Disappoints

A company’s long-term sales performance can indicate its overall quality. Any business can put up a good quarter or two, but the best consistently grow over the long haul. Over the last five years, Churchill Downs grew its sales at a 21.2% annual rate. Although this growth is acceptable on an absolute basis, it fell slightly short of our standards for the consumer discretionary sector, which enjoys a number of secular tailwinds.

2. Mediocre Free Cash Flow Margin Limits Reinvestment Potential

If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.

Churchill Downs has shown poor cash profitability relative to peers over the last two years, giving the company fewer opportunities to return capital to shareholders. Its free cash flow margin averaged 14.9%, below what we’d expect for a consumer discretionary business.

3. New Investments Bear Fruit as ROIC Jumps

ROIC, or return on invested capital, is a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).

On average, Churchill Downs’s ROIC increased by 1.8 percentage points annually each year over the last few years. This is a good sign, and we hope the company can continue improving.

Final Judgment

Churchill Downs doesn’t pass our quality test. After the recent drawdown, the stock trades at 13.5× forward P/E (or $89.90 per share). While this valuation is reasonable, we don’t see a big opportunity at the moment. There are more exciting stocks to buy at the moment. We’d recommend looking at one of our top digital advertising picks.

Stocks We Would Buy Instead of Churchill Downs

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