Reasons CHDN is Risky and 1 Stock to Buy Instead

Over the past six months, Churchill Downs's stock price fell to $74.86. Shareholders have lost 16% of their capital, which is disappointing considering the S&P 500 has climbed by 16.3%. This might have investors contemplating their next move.

Is now the time to buy Churchill Downs, or should you be careful about including it in your portfolio? Check out our in-depth research report to see what our analysts have to say, it's free.

Despite the more favorable entry price, we're cautious about Churchill Downs. Here are three reasons why CHDN doesn't excite us, plus one stock we'd rather own.

A company's long-term sales performance is one signal of its overall quality. Any business can put up a good quarter or two, but many enduring ones grow for years. Over the last five years, Churchill Downs grew its sales at a 15.5% compounded annual growth rate. Although this growth is acceptable on an absolute basis, it fell slightly short of our standards for the consumer discretionary sector, which enjoys a number of secular tailwinds.

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 8.8%, somewhat low compared to the best consumer discretionary companies that consistently pump out 65%+.

Churchill Downs doesn't pass our quality test. Following the recent decline, the stock trades at 10.6× forward P/E (or $74.86 per share). This valuation multiple is fair, but we don't have much confidence in the company. There are better investments elsewhere. Let us point you toward the most dominant software business in the world.

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