CFA Research Challenge Presentation 2014

Recommendation

Our fair value range (3-year): $88-92Current Price: $91.25

CHDN: HOLD

Business Overview

Competitive Environmen

t

Valuation Analysis

Risk Analysis Conclusion

Market Profile (as of Feb. 14)

Ticker Symbol (NSDQ): CHDN

Market Capitalization: 1.59B

52-wk Price Range: 63.61-95.53

Dividend Yield: 0.90%

Daily Volume: 44,729

P/E (forward): 21.59

Price to Book: 2.17

Beta (5 year): 1.05

Business Overview

Competitive Environmen

t

Valuation Analysis

Risk Analysis Conclusion

Business Overview

Background

Racing growth unimpressive

41%25%

30%

Sales MixRacing

Online

Gaming

Other

Business Overview

Competitive Environmen

t

Valuation Analysis

Risk Analysis Conclusion

2009

2010

2011

2012

80.0

85.0

90.0

95.0

100.0100.0

92.7

87.4 88.3

Pari-Mutuel Handle Change Year-over-

Year

% o

f 2009 H

andle

Business Overview

Competitive Environmen

t

Valuation Analysis

Risk Analysis Conclusion

Diversification Strategy

8 Acquisitions in Online and Gaming since 2008 Online and Gaming segments have attractive

economics and growth opportunities

Business Overview

Competitive Environmen

t

Valuation Analysis

Risk Analysis Conclusion

Racing Gaming Online

-10%

0%

10%

20%

30%

40%

Segment Margins & Expected Revenue Growth

5 Year Exp. Revenue Growth

Financial Analysis

Business Overview

Competitive Environmen

t

Valuation Analysis

Risk Analysis Conclusion

Operational success vs. peersDiversification drives:

Revenue Growth Margin Growth

Gaming Legislation Potential

SB 1739 pending in Illinois Adding 5 new casinos Allowing slot machines at horse

racetracks Potentially 600 at Arlington Park

HB 443 pending in Kentucky Adding 7 casino locations Potential 600 slot machines at

Churchill Downs Lower chance of passing in near

future

Business Overview

Competitive Environmen

t

Valuation Analysis

Risk Analysis Conclusion

47%

13%

40%

Legislation Weights

Either

Both

Neither

Valuation Analysis $88-92

Business Overview

Competitive Environmen

t

Valuation Analysis

Risk Analysis Conclusion

$88-92

FA/Sx.8-.9

Segment

Growth &

Margins

Debt & Beta

.85-.96

Effects of Legislation on the Gaming Segment

Scenario Price Probability

1 Expansion 91-95 40-47%

2 Expansions 93-100 13-20%

No Expansion 82-85 40%

Example: 1 Expansion

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

400600800

100012001400

Total Revenue by Scenario

Sensitivity Analysis $88-92

FA/SxOnlineScenario Price

FA/Sx Constant .90 88-90

FA/Sx (.90, .85, .80) 90-92

Acquisitions may further lower CHDN’s FA/SxOnline ratio

Center of our rangeOnline CAGR needed for 20% MOS:

7.7% in perpetuity – unlikelyIf online margins decline, there is a

large effect on the fair valueLT Online Margin

SensitivityOnline Margins Price

32% 87.5030% 85.0028% 82.50

Price Gaming LT Growth

Online LT Growth

5.0% 4.0% 3.0%7.0% 105.00 100.00 97.50

6.0% 99.50 96.00 93.00

5.0% 94.50 92.00 89.50

4.0% 91.00 88.50 86.50

3.0% 87.50 85.50 83.50

Business Overview

Competitive Environmen

t

Valuation Analysis

Risk Analysis Conclusion

Valuation Analysis $88-92

Business Overview

Competitive Environmen

t

Valuation Analysis

Risk Analysis Conclusion

2008

2009

2010

2011

2012

2013

TTM20

1420

1520

1620

1720

1820

19-40

0

40

80

120

160

FCFE

• Growth Driven by Legalization/ Acquisition

FA/S continues fall• Interest Rate Normalization• Continued Diversification Increasing

Margins

Common Ratios

Business Overview

Competitive Environmen

t

Valuation Analysis

Risk Analysis Conclusion

Price builds in growthConsistent with FCFE ModelDiversification complicates multiples analysis

CHDN PNK PENN CZR MNTG0

0.5

1

1.5

2

2.52.06

1.03

0.3 0.35 0.29

Price/Sales

CHDN PNK PENN CZR-5

0

5

10

15

20

25

3024.7 23.3

8.9

-2.01

Trailing P/E

Investment Risks

Investment Risks

KY & IL gaming

legislation potential

Narrow online moat – lower barriers to

entry

Decline in popularity of horseracing

Uncertainty of continued

diversification strategy and use of debt financing

Business Overview

Competitive Environmen

t

Valuation Analysis

Risk Analysis Conclusion

Recent Debt Issuance

Business Overview

Competitive Environmen

t

Valuation Analysis

Risk Analysis Conclusion

• Stellar balance sheet

• Use debt financing to repay “portions” of outstanding borrowings

• Management experience with M&A

Opportunities for expansion w/ Revolving

Credit Facility

Conclusion

3 Reasons for Caution: The future of the diversification strategy Potential gaming legislation in KY & IL CHDN trading at fair valuation

Recommendation:

Fair value estimate:

Business Overview

Competitive Environmen

t

Valuation Analysis

Risk Analysis Conclusion

HOLD

$88 - $92

Questions?