Over the past six months, Churchill Downs’s stock price fell to $112.83. Shareholders have lost 14.4% of their capital, disappointing when considering the S&P 500 was flat. This may have investors wondering how to approach the situation.

Is there a buying opportunity in Churchill Downs, or does it present a risk to your portfolio? Get the full stock story straight from our expert analysts, it’s free.

Despite the more favorable entry price, we're cautious about Churchill Downs. Here are three reasons why there are better opportunities than CHDN and a stock we'd rather own.

Why Is Churchill Downs Not Exciting?

Famous for hosting the Kentucky Derby, Churchill Downs (NASDAQ:CHDN) operates a horse racing, online wagering, and gaming entertainment business in the United States.

1. Projected Revenue Growth Is Slim

Forecasted revenues by Wall Street analysts signal a company’s potential. Predictions may not always be accurate, but accelerating growth typically boosts valuation multiples and stock prices while slowing growth does the opposite.

Over the next 12 months, sell-side analysts expect Churchill Downs’s revenue to rise by 7.7%, a deceleration versus its 22.9% annualized growth for the past two years. This projection doesn't excite us and implies its products and services will face some demand challenges.

2. Mediocre Free Cash Flow Margin Limits Reinvestment Potential

If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.

Churchill Downs has shown poor cash profitability over the last two years, giving the company limited opportunities to return capital to shareholders. Its free cash flow margin averaged 3%, lousy for a consumer discretionary business. The divergence from its good operating margin stems from its capital-intensive business model, which requires Churchill Downs to make large cash investments in working capital and capital expenditures.

3. Previous Growth Initiatives Haven’t Impressed

Growth gives us insight into a company’s long-term potential, but how capital-efficient was that growth? A company’s ROIC explains this by showing how much operating profit it makes compared to the money it has raised (debt and equity).

Churchill Downs historically did a mediocre job investing in profitable growth initiatives. Its five-year average ROIC was 7.4%, somewhat low compared to the best consumer discretionary companies that consistently pump out 25%+.

Final Judgment

Churchill Downs isn’t a terrible business, but it doesn’t pass our bar. After the recent drawdown, the stock trades at 16.3× forward price-to-earnings (or $112.83 per share). While this valuation is reasonable, we don’t really see a big opportunity at the moment. We're pretty confident there are more exciting stocks to buy at the moment. We’d recommend looking at one of our top software and edge computing picks.

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