On Monday, Wells Fargo made a positive adjustment to its outlook on Churchill Downs , Inc. (NASDAQ:CHDN), upgrading the stock from Equal Weight to Overweight and increasing the price target to $141 from $137. The adjustment reflects a potential 17% upside for the company's shares.
The firm identified several factors contributing to the improved rating. Among these were a series of near-term catalysts expected to boost the company's performance, including a favorable first-quarter earnings report set for release on April 24, robust earnings before interest, taxes, depreciation, and amortization (EBITDA) from the Kentucky Derby in early May, the anticipated ramp-up of operations in Terre Haute in the second half of 2024, and the late third-quarter opening of The Rose.
Moreover, the analyst noted that recent legislative changes in Virginia have alleviated previous concerns, setting the stage for growth and margin expansion in Historical Racing Machines (HRMs) within the state.
This development, coupled with the anticipated peak in net leverage in the first quarter of 2024, signals the end of a three-year capital expenditure cycle totaling $1.5 billion and a shift towards a period of higher free cash flow for Churchill Downs. The company is projected to generate $10-11 of free cash flow in 2025, which would represent an approximate 9% yield.
The upgrade also comes after a period of underperformance for Churchill Downs' stock year-to-date, which has seen a decline of 11% compared to a 4% decline in benchmark peers and a 7% rise in the S&P 500 index. The Wells Fargo analyst considers the current valuation an attractive entry point for investors.
InvestingPro Insights
InvestingPro data provides a deeper look into Churchill Downs, Inc. (NASDAQ:CHDN) as investors anticipate the upcoming earnings report. The company's market capitalization stands at $9.09 billion, with a P/E ratio of 22.35, reflecting investor confidence in its earnings potential.
Notably, the P/E ratio adjusted for the last twelve months as of Q4 2023 is slightly higher at 25.7, suggesting a premium on its earnings relative to the market. The company's robust revenue growth of 36.02% in the same period underlines its strong performance. Moreover, with a gross profit margin of 32.32%, Churchill Downs showcases its ability to maintain profitability.
InvestingPro Tips highlight that Churchill Downs has a commendable track record of raising its dividend for 13 consecutive years, signaling a reliable return to shareholders. Moreover, the company has maintained dividend payments for an impressive 50 consecutive years.
Still, investors should be aware of the concerns raised by analysts, including the fact that three analysts have revised their earnings downwards for the upcoming period, and that the company is trading at a high revenue and Price/Book valuation multiple.
Despite these concerns, Churchill Downs has been profitable over the last twelve months and analysts predict profitability to continue this year, with a strong return over the last five and ten years. With these insights, investors can better assess the potential risks and rewards associated with Churchill Downs' stock.
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