Wells Fargo: Churchill Downs - Looking Like A Good Bet Ahead Of Derby

Shares of Churchill Downs, Inc.

have been off and running so far in 2015, and now they are getting a boost from Wells Fargo's latest note.

On February 27, Wells Fargo released a research note, "Healthy Q4 Results - Strong Trends Ahead of Derby," maintaining its Outperform rating while revising its 2015 earnings estimate up to reflect the healthy environment for future growth. WFC increased its "2015/2016 EPS estimates from $3.95/$4.69 to $4.00/$4.71" and maintained its "valuation range at $120-125." Wells valuation range "is based on a blended 9.6-10.0x 2016E Net EBITDA, less net debt." Risk factors include "a soft U.S. macro environment, and new casino supply." Wells Fargo - Rationale Churchill Downs remains a top Gaming idea for 2015 at Wells. Positive catalysts include:  "…additional asset purchases or deployment of cash, legalization of gaming in KY, (gaming expansion in IL, and continued growth in the Kentucky Derby asset."  CHDN reported "healthy Q4 results driven by strong Gaming profitability and impressive initial results from its recently closed Big Fish acquisition."  Wells remains a buyer, citing CHDN's: "(1) strong FCF growth; (2) compelling valuation, supported by iconic, high ROIC assets; and (3) several layers of attractive growth options." Q4 Gaming/Online results  "CHDN reported Q4 Adjusted EBITDA of $24.7MM (ex-Big Fish), 13% above [WFC] estimate of $21.8MM."  "Net/net, combined Gaming/Online EBITDA was 7% better than [WFC] estimate.  Notably, "2015/2016E EBITDA estimates remain relatively unchanged." Racing: Strong early trends for Derby  "Management noted that its Racing segment ex-Derby continues to be challenging. It does not see trends changing in 2015, and will continue to focus on improving cost structure going forward."  However, CHDN "indicated that key metrics for this year's Derby are tracking ahead of prior year, and its construction project remains on budget and on schedule."  Wells is "conservatively estimating Derby growth of 5% Y/Y in 2015 ($5MM EBITDA)." Casinos (Gaming): Profitability remains strong  "Revenue weakness at several properties was offset by growth at Oxford."  Churchill Downs "continues to focus on operational efficiency, and its Gaming segment benefited from improved profitability, with margins (ex MVG) up ~200bps Y/Y to 25.3%."  "CHDN's gaming assets should benefit from lower gas prices… notably, more trips and higher win per trip in Q4, particularly from the higher and middle tiers of its database."  "Big Fish is performing in line with Management expectations… bookings increased 33% Y/Y in Q4 and 20% Y/Y for 2014."  "Management stated that growth is in line with expectations, and expects to give more detailed commentary on trends after Q1."