Churchill Downs Earns Upgrade, Analyst Says Derby Cancellation Unlikely

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Churchill Downs Inc. (NASDAQ:CHDN) is trading higher Monday after J.P. Morgan upgraded the beleaguered stock to “overweight” from “neutral” after it tumbled 22 percent last week.

J.P. Morgan upgraded Churchill Downs and views a Kentucky Derby cancellation as unlikely. (Image: Bleacher Report)

Declines of 20 percent or more from a security’s most recent high are considered bear markets. Entering today, shares of Churchill Downs resided 24.36 percent below the 52-week high. But J.P. Morgan analyst Daniel Politzer views the stock as a possible shelter from the storm play.

With its stable/growing cash flow profile, strong balance sheet, and trophy asset in the Kentucky Derby, [Churchill Downs] is an increasingly compelling place for investors to hide out during the current wave of market volatility, while offering out-year upside as growth projects come online during 2020-2021,” said Politzer in a note to clients.

Projects that could bolster the company’s growth profile this year include the ongoing effort to get the BetAmerica mobile betting app operational in Indiana and Pennsylvania, and expansion of historical horse racing (HHR) offerings.

Derby Fears Overstated

Because of the novel coronavirus outbreak, there is increasing speculation that major sporting events – including the Kentucky Derby – could be canceled. At least one online sportsbook is offering odds on the fate of the 2020 Summer Olympics, slated to start July 24 in Tokyo.

Last week, the National College Players Association (NCPA), an advocacy group for college athletes, suggested that the NCAA bar fans from attending March Madness games to stem the spread of the respiratory illness.

Politzer believes the Kentucky Derby, which has been run for 145 consecutive years, is unlikely to be scrapped, and that related fears are overblown. However, he did hedge his bets, acknowledging that no one knows for sure what the fate of the first leg of the Triple Crown will be this year.

“While we are not calling a bottom in CHDN here, nor can we say with strong confidence that the Derby will take place on May 2nd as scheduled, we believe the stock’s 14% decline in the past two trading days (24% off its recent high) vs. the S&P’s 5% decline, and 18% upside relative to our price target ($148, unchanged) provides an attractive risk/reward,” said the analyst.

Monitoring The Situation

When Churchill Downs reported fourth-quarter earnings last week, CEO Bill Carstanjen said the company is monitoring the epidemic and how it may impact the company’s events – including the Derby.

Carstanjen noted that although the company would like to see more international competitors in the Run for the Roses, he isn’t too concerned about the coronavirus paring the field. That’s because if a horse from another country is removed, the next eligible American mount will be entered into the field of 20.

J.P. Morgan’s $148 price target on Churchill Downs stock is below the Wall Street average of $160. Both are well above the $127 area where the shares currently trade.

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