BUY HOLD SELL A+ A A- B+ B B- C+ C C- D+ D D- E+ E E- F Annual Dividend Rate BUY BUY RATING SINCE 05/12/2011 TARGET PRICE $163.24 BUSINESS DESCRIPTION Churchill Downs Incorporated provides pari-mutuel horseracing, online account wagering on horseracing, and casino gaming services. It operates through Racing, Casinos, TwinSpires, Big Fish Games, and Other Investments segments. STOCK PERFORMANCE (%) 3 Mo. 1 Yr. 3 Yr (Ann) Price Change -11.78 0.39 14.94 GROWTH (%) Last Qtr 12 Mo. 3 Yr CAGR Revenues 14.94 38.79 18.98 Net Income 279.71 52.87 6.25 EPS 277.77 56.57 5.89 Sector: Consumer Goods & Svcs Sub-Industry: Casinos & Gaming Source: S&P Weekly Price: (US$) SMA (50) SMA (100) 1 Year 2 Years Rating History BUY TARGET PRICE $163.24 170 160 150 140 130 120 110 100 90 80 RETURN ON EQUITY (%) Ind Avg S&P 500 Q1 2016 11.22 102.16 11.95 Q1 2015 6.51 27.50 14.20 Q1 2014 7.55 24.87 14.48 P/E COMPARISON Volume in Thousands 2015 2016 COMPUSTAT for Price and Volume, TheStreet Ratings, Inc. for Rating History RECOMMENDATION We rate () a BUY. This is driven by multiple strengths, which we believe should have a greater impact than any nesses, and should give investors a better performance opportunity than most stocks we cover. The company's strengths can be seen in multiple areas, such as its revenue growth, impressive record of earnings per share growth, compelling growth in net income, notable return on equity and increase in stock price during the past year. We feel its strengths outweigh the fact that the company shows operating cash flow. 750 500 250 0 31.65 28.36 Ind Avg 24.45 S&P 500 HIGHLIGHTS 's revenue growth has slightly outpaced the industry average of 11.2%. Since the same quarter one year prior, revenues rose by 14.9%. Growth in the company's revenue appears to have helped boost the earnings per share. EPS ANALYSIS¹ ($) reported significant earnings per share improvement in the most recent quarter compared to the same quarter a year ago. The company has demonstrated a pattern of positive earnings per share growth over the past two years. We feel that this trend should continue. During the past fiscal year, increased its bottom line by earning $3.68 versus $2.56 in the prior year. This year, the market expects an improvement in earnings ($5.57 versus $3.68). Q1-0.04 Q2 3.21 Q3 0.20 Q4-0.81 Q1-0.09 Q2 3.10 Q3 0.24 Q4 0.43 Q1 0.16 The net income growth from the same quarter one year ago has significantly exceeded that of the S&P 500 and the Hotels, Restaurants & Leisure industry. The net income increased by 279.7% when compared to the same quarter one year prior, rising from -$1.56 million to $2.80 million. 2014 2015 NA = not available NM = not meaningful 2016 1 Compustat fiscal year convention is used for all fundamental data items. The return on equity has improved slightly when compared to the same quarter one year prior. This can be construed as a modest strength in the organization. In comparison to the other companies in the Hotels, Restaurants & Leisure industry and the overall market, 's return on equity is significantly below that of the industry average and is below that of the S&P 500. After a year of stock price fluctuations, the net result is that 's price has not changed very much. Although its earnings growth may have played a role in this flat result, don't lose sight of the fact that the performance of the overall market, as measured by the S&P 500 Index, was essentially similar. Looking ahead, the stock's rise over the last year has already helped drive it to a level which is relatively expensive compared to the rest of its industry. We feel, however, that the other strengths this company displays justify these higher price levels. PAGE 1
PEER GROUP ANALYSIS REVENUE GROWTH AND EBITDA MARGIN* Revenue Growth (TTM) -100% 600% UNFAVORABLE ERI 12.5% MPEL EBITDA Margin (TTM) FAVORABLE IGT SGMS BYD MGM PENN PNK WYNN CZR 35% Companies with higher EBITDA margins and revenue growth rates are outperforming companies with lower EBITDA margins and revenue growth rates. Companies for this scatter plot have a market capitalization between $715.6 Million and $14.2 Billion. Companies with NA or NM values do not appear. *EBITDA Earnings Before Interest, Taxes, Depreciation and Amortization. REVENUE GROWTH AND EARNINGS YIELD Revenue Growth (TTM) -100% 600% UNFAVORABLE SGMS -180% Earnings Yield (TTM) CZR FAVORABLE IGT ERI MGM PENN BYD PNK WYNN MPEL 20% Companies that exhibit both a high earnings yield and high revenue growth are generally more attractive than companies with low revenue growth and low earnings yield. Companies for this scatter plot have revenue growth rates between -40.9% and 501.6%. Companies with NA or NM values do not appear. INDUSTRY ANALYSIS The hotels, restaurant, and leisure industry consists of hotels, restaurants, casinos, cruise lines, resorts, and theme parks. Demand is driven by a fairly consistent group of factors throughout the whole of the industry: personal income levels, total employment, and consumer confidence. In recent years, catastrophic weather, fear of terrorism, and health epidemics directly impacted the industry in a material way. The industry is capital, marketing, personnel, energy, maintenance, and technology intensive. Major players include Intercontinental Hotels Group (IHG), Marriott International Inc. (MAR), Las Vegas Sands (LVS), MGM Resorts International (MGM), McDonald s (MCD), and Yum! Brands (YUM). The foodservice industry employs more than 12 million people, making it America s second largest employer after the U.S. government. Not only is the industry huge, it s growing, as factors - such as a rise in two-income households - have been leading to increasing levels of dining out. In recent years, restaurant sales have risen roughly 5% annually according to National Restaurant Association estimates. However, despite its growth rate, the industry should be seen as mature. Companies within the industry generally earn thin margins and face stiff competition. As a result, M&A activity is frequent as competitors look to spread fixed costs across more locations. Both tourism and business travel remain vital to the industry, and as a result, U.S. GDP growth, consumer confidence, and corporate earnings remain vital to the industry s success. The expansion in capital spending has been in response to projected demand. However, overdevelopment in certain areas is a concern. Looking forward, any prolonged low occupancy rates could threaten hotels that are heavily leveraged. As for metrics, occupancy, average daily room rate, and revenue per available room should be considered when analyzing the industry or a player within the industry. Casinos generate roughly $68 billion in revenues annually, and typically, 50% of a casino hotel s revenues come from gaming, 20% from hotel rooms, 15% from food and beverages, and 15% from retail stores, shows, and other entertainment offerings. Expansion and consolidation have been recent trends of note. In 2005 alone, MGM Resorts International purchased Mandalay Resort Group for close to $8 billion and Harrah s bought Caesars for over $9 billion. Recent years have also seen a good amount of new casino construction in the $700 million range as competitors jockey to attract visitors by providing more elaborate offerings. Looking ahead, further capacity expansion may threaten margins. Meanwhile, most of the industry s top-line growth has come from Native American casinos, which at present generate roughly $16 billion in revenues annually. PEER GROUP: Hotels, Restaurants & Leisure Recent Market Price/ Net Sales Net Income Ticker Company Name Price ($) Cap ($M) Earnings TTM ($M) TTM ($M) 124.37 2,077 31.65 1,249.79 69.56 SGMS SCIENTIFIC GAMES CORP 10.03 876 NM 2,782.10-1,400.20 MPEL MELCO CROWN ENTMT LTD 13.92 7,567 87.00 4,024.12 84.91 ERI ELDORADO RESORTS INC 15.27 719 5.83 765.90 123.72 PNK PINNACLE ENTERTAINMENT INC 11.72 716 12.88 2,299.03 62.61 IGT INTL GAME TECHNOLOGY PLC 19.44 3,908 NM 5,103.34-120.18 BYD BOYD GAMING CORP 19.20 2,152 49.23 2,201.23 45.32 MGM MGM RESORTS INTERNATIONAL 25.09 14,180 NM 9,067.51-550.77 PENN PENN NATIONAL GAMING INC 15.19 1,239 66.04 2,930.67 22.53 CZR CAESARS ENTERTAINMENT CORP 8.35 1,216 NM 4,569.00-1,160.00 WYNN WYNN RESORTS LTD 100.79 10,260 32.41 3,981.32 315.11 The peer group comparison is based on Major Casinos & Gaming companies of comparable size. PAGE 2
Annual Dividend Rate COMPANY DESCRIPTION Churchill Downs Incorporated provides pari-mutuel horseracing, online account wagering on horseracing, and casino gaming services. It operates through Racing, Casinos, TwinSpires, Big Fish Games, and Other Investments segments. The company operates racing facilities, such as Churchill Downs Racetrack in Louisville, Kentucky; Arlington International Race Course in Arlington Heights with 10 off-track betting (OTB) facilities in Illinois; Fair Grounds Race Course in New Orleans along with 12 OTBs in Louisiana; and Calder Race Course in Miami Gardens, Florida. It also operates five casinos, which provides brick-and-mortar real-money casino gaming services with approximately 8,500 gaming positions; and operates 2 hotels. In addition, the company through TwinSpires.com engages in the advance deposit wagering business that accepts online and mobile pari-mutuel wagers, as well as offers streaming video of live horse races along with race replays and an assortment of racing and handicapping information. Further, it offers reports, statistical information, handicapping information, pedigrees, and other data to organizations, publications and individuals within the thoroughbred industry. Additionally, the company produces and distributes social casino, casual and mid-core free-to-play, and premium paid games for PC, Mac, and mobile devices. It also manufactures and operates pari-mutuel wagering systems for racetracks, OTB facilities, and other pari-mutuel wagering businesses; and provides totalisator and Internet-based interactive gaming services, as well as operates a multimedia poker periodical. Churchill Downs Incorporated was founded in 1928 and is headquartered in Louisville, Kentucky. STOCK-AT-A-GLANCE Below is a summary of the major fundamental and technical factors we consider when determining our overall recommendation of shares. It is provided in order to give you a deeper understanding of our rating methodology as well as to paint a more complete picture of a stock's strengths and nesses. It is important to note, however, that these factors only tell part of the story. To gain an even more comprehensive understanding of our stance on the stock, these factors must be assessed in combination with the stock s valuation. Please refer to our Valuation section on page 5 for further information. FACTOR SCORE Growth 4.5 out of 5 stars Measures the growth of both the company's income statement and cash flow. On this factor, has a growth score better than 80% of the stocks we rate. Total Return 3.5 out of 5 stars Measures the historical price movement of the stock. The stock performance of this company has beaten 60% of the companies we cover. Efficiency 3.5 out of 5 stars Measures the strength and historic growth of a company's return on invested capital. The company has generated more income per dollar of capital than 60% of the companies we review. Price volatility 4.0 out of 5 stars Measures the volatility of the company's stock price historically. The stock is less volatile than 70% of the stocks we monitor. Solvency 3.0 out of 5 stars Measures the solvency of the company based on several ratios. The company is more solvent than 50% of the companies we analyze. 600 North Hurstbourne Parkway, Suite 400 Louisville, KY 40222 USA Phone: 502-636-4400 http://www.churchilldownsincorporated.com Income 3.0 out of 5 stars Measures dividend yield and payouts to shareholders. The company's dividend is higher than 50% of the companies we track. THESTREET RATINGS RESEARCH METHODOLOGY TheStreet Ratings' stock model projects a stock's total return potential over a 12-month period including both price appreciation and dividends. Our Buy, Hold or Sell ratings designate how we expect these stocks to perform against a general benchmark of the equities market and interest rates. While our model is quantitative, it utilizes both subjective and objective elements. For instance, subjective elements include expected equities market returns, future interest rates, implied industry outlook and forecasted company earnings. Objective elements include volatility of past operating revenues, financial strength, and company cash flows. Our model gauges the relationship between risk and reward in several ways, including: the pricing drawdown as compared to potential profit volatility, i.e.how much one is willing to risk in order to earn profits; the level of acceptable volatility for highly performing stocks; the current valuation as compared to projected earnings growth; and the financial strength of the underlying company as compared to its stock's valuation as compared to projected earnings growth; and the financial strength of the underlying company as compared to its stock's performance. These and many more derived observations are then combined, ranked, weighted, and scenario-tested to create a more complete analysis. The result is a systematic and disciplined method of selecting stocks. PAGE 3
Consensus EPS Estimates² ($) IBES consensus estimates are provided by Thomson Financial FINANCIAL ANALYSIS 's gross profit margin for the first quarter of its fiscal year 2016 is essentially unchanged when compared to the same period a year ago. Sales and net income have grown, and although the growth in revenues has outpaced the average competitor within the industry, the net income growth has not. has very liquidity. Currently, the Quick Ratio is 0.32 which clearly shows a lack of ability to cover short-term cash needs. The company's liquidity decreased from the same period a year ago, despite already having very liquidity to begin with. This would indicate deteriorating cash flow. 3.52 Q2 FY16 5.57 E 2016(E) 6.86 E 2017(E) During the same period, stockholders' equity ("net worth") has decreased by 11.35% from the same quarter last year. The key liquidity measurements indicate that the company is in a position in which financial difficulties could develop in the near future. INCOME STATEMENT Net Sales ($mil) 288.40 250.91 EBITDA ($mil) 40.10 30.40 EBIT ($mil) 9.40 2.27 Net Income ($mil) 2.80-1.56 STOCKS TO BUY: TheStreet Quant Ratings has identified a handful of stocks that can potentially TRIPLE in the next 12-months. To learn more visit www.thestreetratings.com. BALANCE SHEET Cash & Equiv. ($mil) 74.30 70.30 Total Assets ($mil) 2,238.30 2,302.37 Total Debt ($mil) 987.20 701.05 Equity ($mil) 619.40 698.74 PROFITABILITY Gross Profit Margin 25.66% 24.79% EBITDA Margin 13.90% 12.11% Operating Margin 3.26% 0.91% Sales Turnover 0.56 0.39 Return on Assets 3.10% 1.97% Return on Equity 11.22% 6.51% DEBT Current Ratio 0.47 0.59 Debt/Capital 0.61 0.50 Interest Expense 10.60 7.48 Interest Coverage 0.89 0.30 SHARE DATA Shares outstanding (mil) 17 18 Div / share 0.00 0.00 EPS 0.16-0.09 Book value / share 37.09 39.74 Institutional Own % NA NA Avg Daily Volume 88,930 85,695 2 Sum of quarterly figures may not match annual estimates due to use of median consensus estimates. PAGE 4
RATINGS HISTORY Our rating for has not changed since 5/12/2011. As of 6/9/2016, the stock was trading at a price of which is 18.7% below its 52-week high of $152.98 and 5.1% above its 52-week low of $118.33. 2 Year Chart BUY: $89.05 2014 2015 $160 $140 $120 $100 MOST RECENT RATINGS CHANGES Date Price Action From To 6/9/14 $89.05 No Change Buy Buy Price reflects the closing price as of the date listed, if available RATINGS DEFINITIONS & DISTRIBUTION OF THESTREET RATINGS (as of 6/9/2016) 38.56% Buy - We believe that this stock has the opportunity to appreciate and produce a total return of more than 10% over the next 12 months. 31.18% Hold - We do not believe this stock offers conclusive evidence to warrant the purchase or sale of shares at this time and that its likelihood of positive total return is roughly in balance with the risk of loss. 30.26% Sell - We believe that this stock is likely to decline by more than 10% over the next 12 months, with the risk involved too great to compensate for any possible returns. TheStreet Ratings 14 Wall Street, 15th Floor New York, NY 10005 www.thestreet.com Research Contact: 212-321-5381 Sales Contact: 866-321-8726 VALUATION BUY. 's P/E ratio indicates a premium compared to an average of 28.36 for the Hotels, Restaurants & Leisure industry and a premium compared to the S&P 500 average of 24.45. Conducting a second comparison, its price-to-book ratio of 3.35 indicates a premium versus the S&P 500 average of 2.79 and a significant discount versus the industry average of 25.41. The price-to-sales ratio is below the S&P 500 average and is well below the industry average, indicating a discount. Price/Earnings 31.65 Peers 28.36 Premium. A higher P/E ratio than its peers can signify a more expensive stock or higher growth expectations. is trading at a premium to its peers. Price/Projected Earnings 18.13 Peers 24.46 Average. An average price-to-projected earnings ratio can signify an industry neutral stock price and average future growth expectations. is trading at a valuation on par with its peers. Price/Book 3.35 Peers 25.41 Discount. A lower price-to-book ratio makes a stock more attractive to investors seeking stocks with lower market values per dollar of equity on the balance sheet. is trading at a significant discount to its peers. Price/Sales 1.66 Peers 2.86 Discount. In the absence of P/E and P/B multiples, the price-to-sales ratio can display the value investors are placing on each dollar of sales. is trading at a significant discount to its industry on this measurement. DISCLAIMER: Price/CashFlow 8.39 Peers 14.51 Discount. The P/CF ratio, a stock s price divided by the company's cash flow from operations, is useful for comparing companies with different capital requirements or financing structures. is trading at a significant discount to its peers. Price to Earnings/Growth 0.63 Peers 2.65 Discount. The PEG ratio is the stock s P/E divided by the consensus estimate of long-term earnings growth. Faster growth can justify higher price multiples. trades at a significant discount to its peers. Earnings Growth lower higher 56.57 Peers 16.76 Higher. Elevated earnings growth rates can lead to capital appreciation and justify higher price-to-earnings ratios. is expected to have an earnings growth rate that significantly exceeds its peers. Sales Growth lower higher 38.79 Peers 9.02 Higher. A sales growth rate that exceeds the industry implies that a company is gaining market share. has a sales growth rate that significantly exceeds its peers. The opinions and information contained herein have been obtained or derived from sources believed to be reliable, but TheStreet Ratings cannot guarantee its accuracy and completeness, and that of the opinions based thereon. Data is provided via the COMPUSTAT Xpressfeed product from Standard &Poor's, a division of The McGraw-Hill Companies, Inc., as well as other third-party data providers. TheStreet Ratings is a division of TheStreet, Inc., which is a publisher. This research report contains opinions and is provided for informational purposes only. You should not rely solely upon the research herein for purposes of transacting securities or other investments, and you are encouraged to conduct your own research and due diligence, and to seek the advice of a qualified securities professional, before you make any investment. None of the information contained in this report constitutes, or is intended to constitute a recommendation by TheStreet Ratings of any particular security or trading strategy or a determination by TheStreet Ratings that any security or trading strategy is suitable for any specific person. To the extent any of the information contained herein may be deemed to be investment advice, such information is impersonal and not tailored to the investment needs of any specific person. Your use of this report is governed by TheStreet, Inc.'s Terms of Use found at http://www.thestreet.com/static/about/terms-of-use.html. PAGE 5