TIVP055: Churchill Downs, Inc. (CHDN): Investing in the Greatest Two Minutes in Sports w/ Shawn O’Malley & Daniel Mahncke

28:18And so at the lower end of that pricing spectrum, you actually get this funnel of college kids and folks in their 20s that just like to dress up and say they were there, get a picture for Instagram, all that kind of stuff. But then these younger attendees do end up funneling into the higher ticket packages as they age, move up the corporate ladder, move up an income status. And then they want to come back and say that they actually watched it from a suite and participated more in the festivities other than just drinking in the infield. I'm sure it's fun, but hearing about those places, what do you say about just sticking with Omaha?

28:56I think that's pretty fun as well. But it's really interesting just how much money is made through ticket sales and how little is coming from actual broadcasting rights. When you look at football clubs or almost any other sport, you see the total reverse. Despite 70 ,000 people in the stadium each week, most of the money is earned from broadcasting. But obviously, it's a bit harder to monetize peak viewership that only lasts for about two minutes, maybe five if people are not fast enough to turn off. But from the financial reporting, they actually grouped together live events with the historical horse racing machines, which is a little tangled.

29:32But combined, the two things reflect about half of the company's entire revenue. So we're definitely not overstating the importance of the Derby to Churchill Downs as a company. And the two are interlinked. Without the hype of the Derby, I'm sure you wouldn't have anywhere near the same interest in playing games based on historical horse races. But yeah, I would like to look more at the business of betting. You hear these expressions that the house always wins. And I'm not sure it does, but I would be curious to hear to what extent you think that's true and how the profit margins can vary across the gambling industry generally.

30:10I'm sure some casinos are more profitable than others, but even then, I would wonder if more mature casinos with longer operating histories tend to be more profitable, for example, or if bets on lifehorse racing are the same or more or less profitable than historical racing machines. they're all good questions i'm not surprised coming from you daniel but i mean if we go back to 2018 when churchill downs sold off big fish games for almost a billion dollars in cash you saw them effectively exit the casual gaming world and embark on the playbook that defines the company today with historical racing machines being a huge part of that and so kicking off that transition was the launch of the Derby City Gaming Facility in Louisville, which opened in September 2018 with 900 HRMs at about$65 million cost to build.

31:04And we've since seen the company's total number of HRMs grow from 1 ,000 in 2020 to 3 ,000 in 2021, almost 7 ,000 in 2022, and now more than 10 ,000 as of 2024. And so we talked about this already, but just to say it again, HRMs are legally tied to historical horse races, not standard slot machines, meaning they sit under horse racing statutes rather than full casino regulatory regimes. And here, I think one of the key pieces of jargon to know is referred to as the win per unit per day, meaning what is the average revenue earned per machine per day over a certain time period. And so, for example, if we look across the company's portfolio of historical racing machines at venues across the country, we see different levels of productivity.

31:55In the Richmond location for HRM betting, the win per unit per day comes out to about$470 over the 12 months ending on October 31st, 2025, meaning each HRM at the Richmond location generated about$470 of house win per day. And that house win number is calculated roughly as total HRM gaming revenue per machine per day after accounting for payouts to players. So it's more of a net revenue number. And since we know that this venue has 1 ,200 HRMs, we can actually figure out about how much total revenue this venue generates, and it's about$200 million annually. And these rates of profitability per machine, you might say, can vary a lot just across the school state.

32:44And their new location in Northern Virginia, the daily revenue per machine net of winning payouts is only$230 on 1 ,650 machines. So that's something like$130 million in annual net revenue. And you would expect Northern Virginia right outside of DC, you would think that would be one of the best markets for the company from a unit economics perspective. That doesn't actually end up being true because these more affluent areas also have more entertainment substitutes and potentially more regulatory scrutiny and community pushback. Plus, there's simply just more machines at this venue. So the usage per machine is lower than in markets where a Churchill Downs venue is the only place to gamble for 100 miles.

33:34And you have several things like one venue being closer to a state that doesn't permit this type of gambling. That can mean much more local traffic plus out-of-state traffic coming in too. And so even though some venues can be twice as profitable per machine, if not more so than other venues, not every venue can house the same number of machines. So their impact on the overall financials varies significantly. Even the most profitable venue, which is actually their newest in Henrico County, Virginia, generates more wins per unit per day for Churchill Downs. That only goes so far if the venue has a fraction of as many HRMs as other venues.

34:17And one of the most important things about these HRM venues beyond their contributions to Churchill Downs for revenue is that they're used in part to contribute to the purse at their corresponding racetracks. And purse for context is the payout to winning horses at live races. So more betting on anonymous historical races via HRMs funnels more funds into the winnings at live horse races, which attracts higher quality horses and jockeys, producing a better racing product that just spins the flywheel of their competitive advantages. And if you don't have successful HRM supporting your racetrack, it's just a lot harder to pay out enough to attract top tier talent.

35:00And without top tier talent, you'll never have the prestige necessary to run a profitable horse racing and gambling business. And that's one of those things that as an outside observer would not be obvious. And as you start to dig in and peel back the onion, you see, okay, this is what really positions Churchill Downs to maybe not have a huge moat, but definitely to have some meaningful competitive advantages that make it challenging for new entrants. It's very interesting. And as most listeners will probably know, it's very hard for us to find a company and cover it and not talk about any sort of flywheel.

35:33Because if it doesn't have any, it's probably not high quality enough to make it onto the show anyway. So there it is. And I think it's fair to say then that Churchill Downs very much does have some competitive advantages compared to, as I said before, most other casino or just gambling businesses. And it comes from their IP and their brand power that helps just attract more consumer attention and top horses to their regulatory relationships, which is an important point as well, maybe one of the most important in the entire industry. And states are typically only willing to approve so many racetracks, casinos, HRMs, and so on, as I understand it.

36:10And so by being something of a proven and just a trusted operator and having existing licenses, that is somewhat of a barrier to entry relative to competition or competition that could potentially come up in the years ahead. So there are actually only a few states that permit HRMs generally, and those are Wyoming, Virginia, Kentucky, Alabama, and New Hampshire, right? Those are the only ones. They are. And yeah, when I was talking about the different videos before, I think I mentioned three separate Virginia locations. And so it's natural to wonder why the business is so concentrated in Virginia.

36:43And I'll just say it is. Kentucky, Virginia, and then to a much lesser extent, New Hampshire are really the three states that they operate these HRMs out of. And for context, Kansas has authorized it, but we're still waiting for the first machines there to really go into effect. And then other states have tried to authorize HRMs, but ran into legal obstacles. So Louisiana lawmakers voted to allow HRMs back in 2021, but then the law was struck down by the state Supreme Court and something similar happened in Oregon. So on the one hand, the HRM business here doesn't really feel like it's on the firmest ground since even in Kentucky and Virginia, Churchill Downs has only been operating HRMs there for a few years.

37:24But also there is just massive potential for entering new markets if new states approve hrms in the future and so for a company with a less than eight billion dollar market cap operating their historical racing machines primarily out of really two states at the moment i mean technically three just intuitively even an additional one or two states entering the market could be really material for the business and none of those states have the history of horse racing that virginia and Kentucky do. So, you know, those are really the two best markets for them and none are going to move the needle as much.

37:58But still, I mean, the point remains, there's a lot, there's 48 other states for them to be looking at. And so a lot of states, though, see HRMs as slot machines in disguise. And so they're not too keen on them, but the ones that do approve them spin it as sort of a different form of parimutuel wagering on racing, which is a lot more palatable than just saying slot machines and then tends to have more favorable local laws regulating it. And so paramutual wagering for context is a system where bettors wage against each other, not against the house, like when you're betting through a bookmaker. And so all bets of a specific type are gathered into this common pool of money.

38:42And before the winners are paid, the racetrack removes a portion of this pool as the takeout. And so takeout in essence is just the price of betting on a sporting event. It's the percentage of every dollar wagered. It's extracted before the winnings are calculated. So basically, in other words, the money generated by takeout is used in part to pay taxes and fund the sport. And the remaining money from the pot of wagers is then divided among all the people who placed a winning bet proportional to their wager amount. That's parimutuel wagering in a nutshell, in contrast to HRMs, which again are more like slot machines.

39:20And so that is everybody's gambling lesson for the day. And if you don't participate in this stuff, I'll be the first to say it is confusing. It is complex, but I also think it's pretty interesting to just get somewhat of an idea of how it works, even if I think most of our listeners, just as the two of us, would probably not spend too much time in casinos in their normal weeks. But I still don't fully understand, maybe you can tell me why Churchill Downs is so concentrated with their HRMs in just those three states. Because technically, they could also be expanding into Alabama and Wyoming and even Kansas soon.

39:56And if the thesis is in part that they could go to these 48 states that they're currently not yet in, why are they not using the states that they could get in today? Well, that's a really good question. And to be clear, and Churchill Downs does operate or have stakes in casinos and gaming venues across actually 11 states overall. But yeah, specifically for HRMs, their focus is narrower. And that is primarily because in those other places, there are local competitors that have come to dominate the market. The taxes are just very prohibitive, or it's too difficult to find space and approval, not only for an HRM venue, but also for a new racetrack for it to be bolted onto, which is usually required.

40:39And so in some places like Wyoming, for example, they would be encroaching on local historical horse racing players like Wyoming Downs, as well as local commercial and tribal casinos. So that gets messy. And that's how you get a strategy where they prefer to focus on areas where they've gotten the green light approvals already very clearly. And so in fact, they have found that it's actually more profitable for them to just concentrate on a specific state, build up the local culture around HRM gaming there and go from there. And it's kind of like, maybe the way I would think of it is like how Uber started by scaling one city at a time.

41:15When you're trying to get people to adopt something new, a much more localized approach can make a ton of sense in the beginning. You can't expand into every city at once. If you go one by one, it's very pragmatic. And so I also say that management has told investors that their HRM facilities target a five-year payback period. And they have generally beaten that. So there are very attractive returns on incremental capital to be earned in these regulated niches, even if so much of the business seems to be concentrated in really just two states because they're just starting to grow their presence in New Hampshire.

41:51And New Hampshire is a much smaller state than Virginia and Kentucky anyways. To stay with the Uber reference, I think what I would consider a possible risk is that Uber once planned on also growing in international markets that they're currently not operating in anymore and just bought stakes in other companies. And I'm asking myself if this is what it could end up being for Churchill Downs, where they think, okay, this is a market that we potentially get in in a couple of years. And then they realize there are competitors already that are so entrenched that they cannot get into this market. And there's only so much market left in the current states that they're operating.

42:26So I think that's something that would probably be relatively interesting to look at. But another thing is just horse racing in general as a sport. How is it doing? Because I know that the Kentucky Derby is doing very well, but it's also a special case that's not entirely representative of the rest of the industry, I would think. And is horse racing and the gaming surrounding it growing or is Churchill Downs just trapped in this relatively stagnating industry, especially as other forms of gambling have become incredibly popular over the last few years. I mean, just a decade ago, you couldn't really legally bet on sports at all in the US, at least in most places.

43:04And yet now you told me that it feels like everyone is just walking around on their phones looking for prop bets and parlays to roll the dice on. It's a fact. I know too many people that are hooked to those apps. But yeah, I mean, And more people in the U.S. are gambling than ever. But as that pie has grown, so have the different ways to bet. Meaning not only is Churchill Downs competing against things like poker and mobile gaming and fantasy football, they're really going up against any form of addictive entertainment that people might choose to indulge in. Scrolling TikTok is also an addictive habit.

43:38And if someone's hooked on that, maybe they aren't going to go down to the tracks to bet on horse races and use HRMs. And so I see Churchill Downs as having three buckets of risk. You've got the popularity of horse racing itself as one bucket, regulators, and then the company's own levered balance sheet. And so in terms of the sport of horse racing, in 2024, there are only 31 ,000 thoroughbred races run in the US. And I actually thought that sounded like a lot when I first heard it. But the number is down 3 % from 2023. So the number of race days in fields has shrunk. And correspondingly, the amount of total betting in industry-wide pari-mutual handles has fallen for three straight years, despite the overall growth in sports betting we've discussed.

44:29So this does really look like an industry in modest decline. And in part, the pivot toward HRMs and regional casinos I would think is meant to address this weakness in live horse racing. But they're very much secular headwinds. facing the sport that the market finds concerning. And so in 2023, Churchill Downs also experienced a cluster of horse fatalities that did not help at all with their public image. They gave animal welfare groups a lot of ammo to frame horse racing as animal abuse. And we are not here to agree or disagree with that. But I think the future of horse racing is not incredibly bright.

45:12And if the sport itself is in decline, then that would eventually erode away at the Kentucky Derby, even if the event is so popular that it remains somewhat insulated for a period of time. You can't remain at the cultural center in the way that it is of being able to command the viewership that it does in a sport that is kind of fading from the inside out. And so adding to the risk profile here. You've got this concentration in just a single event, concentration in a single sport, and concentration of their HRMs and casinos in just a few states on top of a not so conservative financial risk profile either.

45:51And I would say that owning a stock like that is not for the faint of heart. But between the Derby as this really durable trophy assets and the growth in HRMs, hopefully you can start to see what I find appealing here when we're talking about a company trading at 21 times earnings, about two-thirds of the S &P 500's PE, despite a five-year average revenue growth rate of 20 % per year, which is much, much faster than the S &P 500's growth overall. That definitely looks attractive at first glance. So, okay, I did want to ask you about that to some extent, because we've talked about the sport of horse racing and regulations through the lens of, let's say, risk management.

46:32Financially, I actually see a stable record of dividends and buybacks, but there's also a ton of debt here. So how do you think about the financial soundness of Churchill Downs overall? I would not say it's the most inspiring set of finances we've ever looked at on this show. It reminds me of Smith & Wesson, which is a company we did end up passing on due to balance sheet concerns. S &P recently lowered its credit rating on Churchill Downs to BB - from BB in October 2025, which is considered a non-investment grade rating, but not quite junk status, due to slower than anticipated debt reduction and leverage remaining about four times.

47:15So the credit rating agencies continue to see some concerns here. the company's current ratio of 0.57 is well below one, which usually indicates that a business does not have enough liquid current assets to cover its current liabilities, bills that it's got to pay in the next year. And so in other words, there's just not enough cash at the moment to pay the bills coming due soon. And that sounds really bad as I'm saying it out loud, but I really should clarify that that does not mean they will go bankrupt by any means because a lot of that is deferred revenue and accrued gambling payouts which are held in restricted cash reserves and funded by float but still there is not a ton of room for error because they do carry such a significant amount of debt structurally and they spit off a lot of cash business is profitable they have untapped credit facilities if they need to so like i said this is not a company where i'm sitting here going, they actually could go bankrupt, which is something we talked about with Smith & Wesson.

48:19What puzzles me a bit, though, is how committed management has been to returning capital through annual dividends with 15 consecutive years of dividend increases and fairly aggressive share repurchases of over$2.1 billion since 2025, where these are largely being financed using debt. And so management in a way then is making a leverage bet on future expected cash flow growth that can make these buybacks more creative in hindsight and improve the company's leverage ratio over the long term. Whether you agree with it or not, and I wouldn't necessarily say I do, the result has been that they've created some very impressive amount of shareholder value by keeping the business so leveraged.

49:03And for years now, Churchill Downs' stock has outperformed the S &P 500 by a wide margin. I mean, just from what you told me now, it does seem like a pretty risky strategy, but I probably have just too little insight to actually judge the strategy. I mean, we looked at trends time a while back and that is obviously a completely different business model, but it might also be the most leveraged company we hold in our portfolio currently. And the difference there is that you have highly recurring cash flows, huge industry tailwinds, and I think a three decade long history of that strategy working out.

49:37So in this case, I would be much less certain. But again, I haven't looked at the financials to the extent that you have. And there are more bright spots about the business that might help to balance out those financial concerns. I mean, one of them would be Twinspire's Gaming, which is a third business unit besides the Kentucky Derby and then HRM. So what exactly is this part of the business and what should we know about it? well we've implicitly touched on twin spires a few times but it is worth spelling out what this business actually is and this is a part of trip chill balance that actually once tried to play the draft kings and fan duel game as a national online sports book they hated the economics and then they refocused the business on on what they're really good at which is horse race wagering and the rails behind that business.

50:29And so inside of this segment, there are really two pieces. There's a B2C side, which is the Twin Spires horse racing app and website that regular customers use. And then there's a B2B side where Churchill provides the betting infrastructure for other sports books, horse racing products. And that's why it can be a little confusing to talk about Twin Spires. It is more like a bundle of related businesses that all get reported as one line item. And on the consumer side, Twin Spires Horse Racing is one of the largest, according to the company, most profitable legal online horse racing platforms in the US, even though it never became a broad national sports book.

51:10And with that scale, they're offering 24-7, 365 days a year, wagering on roughly 165 ,000 races globally at around 360 racetracks. And on the B2B side, Twin Spires gets paid by other sports books to power their horse racing offerings, providing the racing data and the live video and the handicapping tools, and in some cases, the underlying wagering platform itself to those businesses. And as a customer, if you're using Twin Spires directly, it works just like a standard advanced deposit wagering platform, or ADW. And you fund an account, and then you bet on domestic and international races while watching the live video feeds, not just at Churchill Downs' own tracks, but across a big network of partner racetracks as well.

51:58And it's pretty staggering. But management has said Twin Spires has at times controlled close to half of online horse race wagering in the US. So even though total horse wagering has been flat to down in the US and Europe, the online slice of that pie has been growing over the last five or so years. And Twin Spires is taking a big share of that shift. And industry members suggest online horse race handles in the US has moved from the mid single digit billions annually to the high single digit billions. And Twin Spires itself is processing something on the order of a couple billion dollars of that each year.

52:38Before we get into the valuation, and we to some extent are kind of there, I do want to talk about how Churchill Downs differs from and to some extent is similar to other gambling companies. So listeners have probably heard of businesses like DraftKings, which we mentioned in this episode a couple of times, or Flutter, which owns FanDuel and Penn Entertainment. And my question is, why not pitch them instead? I mean, if they're more diversified in the sense of the sports they're tied to than Churchill Downs, you could argue that's an advantage that apparently from what you told me today, Churchill Downs will probably never have.

53:12so this is going to be a really silly answer from me but i do have this bias where i don't know if i see horse racing to be as bad for society from a gambling perspective in a way as these broader sports books where you can literally bet on a different game every day across dozens of sports and parlays it's just it's a lot of nonsense in my opinion and i'm not saying at all that's the right way to think about it but i i've probably been pretty hesitant personally to cover these other companies where it doesn't feel like they're creating win-wins for society because to me that makes me feel like long-term their businesses are fragile which is not to say anything about churchill downs in this case when we think about uber they got a lot of criticism for you know people didn't like the disruptive the taxi industry people didn't like that Airbnb disrupted local cool neighborhoods.

54:11At the end of the day, the benefits and the convenience that those apps could provide outweighed the negative voices. And when I think about, like I said, these broader national sports books, I think they're really popular right now. Not sure if society will have the same tolerance for them forever, but that's just totally speculation. And maybe I'm falling for the marketing too much, but I do think the Kentucky Derby itself is something of a special asset that almost transcends gambling. The experience is unique. And what originally drew me to looking at Churchill Downs in particular was wondering whether there is some sort of trapped value here, especially when we're talking about a hospitality business that can sell suites for$250 ,000.

54:56That's why I say it transcends gambling in a way. I mean, that is a masterclass on hospitality. And we talk about conglomerate discounts sometimes. And that's because promising businesses or assets can get buried and overlooked in these sprawling companies. And Churchill Downs is a bit sprawling, even if it's not a huge market cap. And so I'll have more to say on that when we get to talk about the valuation. But the intention was to try and determine whether the Kentucky Derby itself is undervalued and whether any value could be unlocked with some kind of catalyst like a spinoff or a take private.

55:29I think I have a slightly different take on horse racing. I mean, this is really just my gut feeling. But when I think about it, in my mind, it's basically immediately going to gambling addiction rather than the sport itself. That's obviously a bit unfair, especially when you think about something like the Kentucky Derby, which is this huge and just culturally important event. But it just feels like the share of people who watch horse racing and bet on it is much higher than in almost any other sport I can think of. But again, this is purely my perception. and it might be very different in countries where horse racing is more of a mainstream sport in its own right.

56:06So yeah, getting back to just the topic of competition and the companies that we talked about earlier, I do still want to hear how Churchill Downs stacks up against these other publicly traded gambling companies, not only looking at it as a more moral way of gambling. So the landscape here is Churchill Downs, Penn, MGM, Flutter, DraftKings, and Caesars. And when you look at them, minus Flutter and DraftKings, these are asset-heavy businesses that are as much about in-person experiences and hospitality as they are about online gambling. And so Penn Entertainment alone, for example, operates more than 40 casinos in the US.

56:48And well, casinos require a lot of capital compared to these app-based platforms like DraftKings, which is just purely a digital business. And so there's no real estate for DraftKings. It's an app. And to a lesser extent, you could say that about Flutter as well with FanDuel, but they do have some retail shops. But just to maybe zoom out a bit, there are roughly a thousand commercial and tribal casinos in the US. So every total population of 340 million people, if you compare that with the 30 casinos in Macau, China, serving 1.4 billion Chinese people, or the twin casinos in Singapore serving a population of 6 million, you can actually see why these Asian casino businesses tend to be much more profitable and better businesses to own.

57:42And so the difference is that the US tends to be looser with casino regulation by global standards. And that actually means that there's more competition here, which reduces the moats of US-based casino companies relative to their peers in Asia. And today, more than 40 US states offer commercial and or tribal gaming with many legalizing wagering activities just in the last two decades. But legal gaming itself in the US goes back almost a century to when gaming was first legalized in Las Vegas back in 1931. And it was not until 1976, though, that Atlantic City allowed gaming too. And that offered really the first real competitive option in the US as an alternative to Vegas.

58:26And then after that, it wasn't until the 90s that you saw several more states begin to legalize gambling and enabling more competition. And since then, we've seen things really heat up online and with physical casinos. I know that I've teased the valuation section now twice, but if we can just go on one more tangent before we get to the valuation, can you speak more about the quality of management here and the compensation as well? Because whenever we are sort of iffy on a company, how aligned the management comp is, shareholders can either be the deal breaker or it could help a lot with just trusting the company and the story that you want to tell to investors.

59:05For starters at the top, Bill Karsangian has been CEO since August 2014 after previously serving in various C-level roles at the company since 2005. And so I would say he has pretty substantial skin in the game with about $190 million worth of stock personally in the business. And then there's Bill Mudd, who has been president and COO since September 2015 after joining Churchill Downs as CFO back in 2007. and Mudd also has significance in the game with$80 million of stock as of when I last checked and CFO Marcia Dahl who's been around since 2015 also owns about$17 million of stock so that's all great to see and I think even better is that these three have overseen very excellent returns for shareholders in their time and from what I can tell they didn't do that just simply by riding a wave of popularity in sports betting Instead, management has proven adept at acquiring and divesting assets opportunistically, expending capital on new built projects that oftentimes very short payback periods and then buying back shares.

1:00:14And so management has remained really incredibly long term focused. And one of the things that they do to signal is that they don't provide quarterly or annual guidance, which is also something that Berkshire Hathaway does. And so it's just one of those subtle things where it shows you how seriously a management team lives by their words. You can talk all day about the long term, but then you're giving guidance on the next quarter. It just seems contradictory. And Buffett, of course, famously does not give any guidance. And another thing I've heard about the company's management team is that they are real masters of the legislative process.

1:00:49They come into lobby states as the owners of the Kentucky Derby, not just some other greedy group out of Las Vegas. And then that means that doors can open for Churchill Downs that do not open for others. And in terms of how well aligned the comp packages are, it's mixed. A lot of the long term comp is based on performance and paid equity. but the performance metrics lean into more manipulatable non-gap numbers like adjusted EBITDA and not returns on capital or earnings per share. And gosh, I feel like we complain about that in just about every pitch now on the show. But a chunk of that comp is in RSUs, restricted stock units.

1:01:32So that means the comp is unlocked simply for just sticking with the company over a period of time. And I have been known to call that something of a participation trophy as opposed to a real incentive package based on performance. Anyways, the long and short of it is I do like the management team. I think the comp could be better aligned with long-term shareholders, but also the track record has been very good. So who am I to argue against that? That's just my two cents. I mean, just from the insights that I got from your pitch today, it seems to me like the management has had a pretty good feel for how to maneuver a gambling business through both competition and also regulation.

1:02:14So that's definitely a positive thing. And if you compare that or just add to that the skin of the game, I think I can look beyond the RSUs and call it decent overall, but probably also not enough to remove some of the doubt about financials, regulation, and all of that, which basically comes from this just very complex business model. anyway let's let's finally do it i tease it a lot so let's talk valuation i mean so far i would say this has been as you said pretty mixed thesis certainly interesting but yeah i don't know i'm hoping you can just you can blow me away with how to think about the business and why it could be an attractive investment yeah well if you think about it in sports terms we've seen private equity lining up to pay these eye-watering prices for slices of NFL teams, NBA teams, sometimes 30 plus times EBITDA in some cases for private illiquid franchises where EBITDA is this kind of rough proxy for operating profits.

1:03:15And so Churchill Downs, by contrast, owns what is basically a publicly traded Super Bowl week in Louisville. And the market is valuing that crown jewel implicitly at a fraction of those other multiples. And the thing is, sometimes the market will give you great chances to snap up this business due to things that really have nothing to do with its long-term viability. And so for example, on May 3rd, 2025, the Kentucky Derby took place in Louisville with its typical pageantry. But unfortunately for Churchill Downs, the race day had inclement weather and there's rain throughout the day that created muddy racing conditions for the horses, which also just hurt the company's financial results as well as betting handle and attendance overall and that hurt ticket sales and concession revenues and all that stuff and so a weak derby result is disappointing and it can drive these really sizable sell-offs in the stock yet i would contend that the performance of a single derby especially one mired by bad weather i mean this is very little about the business's long-term prospects and so you would expect that to almost already be factored into how the market values the stock that there is the possibility of these events.

1:04:25So then why would a one-off rainy day cause such a significant move in shares? So you have to know getting into this thing that the business is not always going up in a straight line despite this record of compounding. It is also not entirely a cyclical business either, but you can definitely imagine much steadier businesses to own at the same time. And so as I said, every so often you'll get a derby where the weather is just awful or a renovation temporarily takes some seating offline or maybe corporate budgets kind of tighten right in the middle of peak booking season. And that can knock a few million off the derby's profits.

1:05:08And then suddenly investors start asking whether the party's over and the shares crash. And my view is that most of those hits to the profit and loss statement are cyclical and idiosyncratic. And the asset itself as a 150-year-old brand is not going anywhere. I could spend a story about how horse racing as an industry is in modest decline, but just to be real, for any foreseeable period of time in the future, I don't see the Kentucky Derby waning in relevance. I mean, like we said, It's continued to attract more and more viewership and impressions on social media and Netflix documentaries. It's really as popular as it's ever been.

1:05:49And yet, at the same time, from nothing, they've grown historical horse racing into this large, profitable chunk of the business. And really, I would say they've only just begun to tap into the potential addressable market for that business. We talked about how the HRMs could go into probably not all 50 states. maybe not even 10 states, but even just two or three more states would be a huge expansion opportunity for them. And if you strip Churchill into pieces on a back of the envelope basis and give the historical horse racing and regional casinos, the kind of multiple that you might expect from just a decent regional operator, and then you value Twin Spires more like kind of a high margin, but slow growth wagering platform.

1:06:35Well, then what's left over the implied multiple for the Kentucky Derby, it's pretty shockingly low. I mean, you're effectively getting one of the world's most recognizable sporting events at a single digit multiple of operating profits. Well, again, private investors are paying nosebleed prices for franchises that I would say are honestly far less iconic than the Kentucky Derby. More international, but definitely far less iconic. That's true. And I mean, gosh, it keeps just being this mixed picture. I mean, the variation certainly seems interesting, but there are just so many factors that just add more and more complexity to it.

1:07:16What I also like here, though, is how the capital allocation behavior lines up with the thesis, right? When investors freak out because one derby is softer than expected and the stock trades down, management has weathered many of these storms and does not panic. And so in the past, what they'll do is they'll slow walk big projects. They'll reassess them and their viability under these new macroeconomic conditions. And in the meantime, they'll buy back big chunks of the company at what I would say amounts to significant discounts where you're getting a single digit multiple on the Derby's operating profits.

1:07:53And so management is essentially telling you, if you don't want this at this price, we will happily take it off your hands. And I think that's great to see. And in Q2, for example, when the stock was depressed after a relatively weak derby in 2025, they repurchased 3.5 % of all outstanding shares for$250 million. And with all that said, it is not a stock that looks as obviously cheap at today's prices as it was even just a few months ago when the market was still reacting to how the weather had affected this previous derby. so given all the risks here and really my lack of experience with this industry I'm not keen to say we have to invest in it right now but I would love to keep it on the watch list and if we can snap up shares down the road especially if there's another derby disappointment man I would be inclined to do so and it would be one of the higher risk bets we've made and we'd have to size it proportionately and there's a lot of ifs being baked into it but yeah that's how I think about it personally.

1:08:58That's a cool lesson to own. I mean, to me, this just seems like a relatively clear case for the two hard bucket. But then again, it's also different if you're from the US and you just get this whole idea of just what a cultural experience it is in the entire country for those, let's say one or two weeks that it's happening. And I just can't have the same idea of the cultural relevance of the events. Since I've never heard of it before, you decided to pitch it today and then you have all the regulation that comes with it and then just the gambling itself and then the debt profile of the company so this opportunity would just need to be outrageously attractive and what i mean by that is basically saying it would need to be much cheaper for me to look past those factors and then accept that i have just very little and basically no unique insight into into the business yeah i think that's totally fair i think that's totally fair.

1:09:52Well, cool. It's been fun. I mean, with everything we've covered today on Churchill Downs, maybe we just transition things and go to a little preview of your pitch for next week, Daniel. Yeah, I must say it's probably not as exciting as this one. I felt like I've learned so much in this pitch and next week we will cover a company that is undoubtedly known by everyone listening to this episode right now. It has been under a bit of pressure recently and it is probably the go-to example when you want to make an argument against efficient markets because a couple of years ago it has, despite its massive scale, been just outrageously mispriced and almost turned into a 10-bagger in the years after that.

1:10:34I think it only took it to start two or three years. And yeah, today it's trading again at a low valuation. Although, to be fair, nowhere near the levels of the past. So, yeah, I don't know. It feels like every other hint would immediately give it away. So, I think I'll leave it at that. Maybe just to help the audience a little bit, I'll say that the stock looked cheapest in 2022. We'll leave it there. Cool. Well, all right, folks. I mean, let's go ahead and wrap things up with a little quote today. So John Steinbeck once said, the profession of book writing makes horse racing seem like a solid, stable business.

1:11:14And I think you could say the same for investing. We'll see you all next week. to TIP. Follow the Intrinsic Value Podcast on your favorite podcast app and visit the investorspodcast.com for show notes and educational resources. This podcast is for informational and entertainment purposes only and does not provide financial, investment, tax or legal advice. The content is impersonal and does not consider your objectives, financial situation or needs. Investing involves risk, including possible loss of principle and past performance is not a guarantee of future results. Listeners should do their own research and consult a qualified professional before making any financial decisions.

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1:12:18Thank you.