Churchill Downs Inc's recent cash and stock deal for online wagering site Youbet.com Inc has the company best known for the Kentucky Derby betting on a faster growth track.
Churchill Downs, which owns four tracks including the namesake venue in Louisville, Kentucky that is the home to the most famous U.S. horse race, has seen its shares slide about 10 percent this year. However, they have soared 75 percent since its March low of $20.71.
The company, which also owns tracks in Florida, Louisiana and Illinois, last month agreed to buy Youbet for $126.4 million to tap into the growing online betting market.
Some analysts said Churchill Downs is well-positioned to gallop past the slow growth of its horse racing business thanks to Youbet and the addition of slot machines at its tracks. It has slots in Louisiana and will add them in Florida next year.
The company also has said it will host a three-day music festival next July with plans to make it an annual event.
Is now the time for investors to wonder whether the sun shines bright on Churchill Downs' old Kentucky home?
BETTING ON ONLINE WAGERING
The key thing for Churchill really is their reshifting toward higher growth business segments, shifting resources away from traditional brick-and-mortar horse racing, which is somewhat in secular decline, said Sidoti & Co analyst Steve Altebrando, who has a buy rating on the stock.
It really changes the growth profile significantly, he said of the Youbet deal. Their largest segment should now be online wagering, which is growing at a 10 percent-plus clip.
They have a lot of excess real estate that the stock market is giving them zero credit for.
They have a terrific franchise in the Kentucky Derby, which is a cash cow.
We always felt ... that eventually people would want to watch racing similar to Hong Kong and London, and that secondly, 'racinos' were a way to make money, and third, that the technology would change to allow them to do other forms of online gaming, said Mario Gabelli, head of Gamco Investors, which owns Churchill Downs stock.
I'm still assessing whether Youbet makes sense, Gabelli said, adding he liked Youbet but liked Churchill Downs even more and did not favor the deal's terms. They're giving away a big piece of the company.
Others question whether Churchill Downs can weather a weak economy over an extended period of time.
The health of the core live racing business has been weak for an extended period of time with no significant improvement in sight, said Hilliard Lyons analyst Jeffrey Thomison, who has a neutral rating on the stock.
They've seen shrinking field sizes for races. That leads to less attractive wagering scenarios, which results in fewer dollars being wagered.
Even the company's signature event, the Kentucky Derby, has seen some impact. Total wagering on the race from all sources, on-track and off-track ... in 2008 was down 3 percent. This year's Derby, that same statistic was down 9 percent.
One of the ways earnings could grow here is getting permission to conduct slot machine operations at the companies' four race tracks. The third and fourth tracks have been problematic and I'm not sure that the outlook is very favorable to get approvals.
This business is not immune to a weak economy. High unemployment and low consumer confidence is having an impact on the level of wagering. It's also affected things such as corporate sponsorships. The weak economy has also affected concession sales and that's a pretty profitable business.
(Reporting by Ben Klayman, editing by Dave Zimmerman)