Executive Summary / Key Takeaways

• Iconic Asset Reinvention: Churchill Downs Incorporated is strategically reinvesting in its flagship Kentucky Derby, with projects like the $280-$300 million Victory Run targeting a 20% unlevered IRR by year three, enhancing premium experiences and driving long-term Adjusted EBITDA growth.
• High-Growth Gaming Footprint: The company is aggressively expanding its Historical Racing Machine (HRM) and regional gaming presence, particularly in Virginia and Kentucky, with new venues like The Rose Gaming Resort and Marshall Yards, and the recent acquisition of Casino Salem in New Hampshire.
• Technological Edge with Exacta: Proprietary Exacta technology provides a competitive moat, optimizing HRM operations, reducing costs, and enabling B2B growth, with future potential in HRM-based electronic table games (ETGs) to diversify offerings.
• Robust Financials & Disciplined Capital: Despite macroeconomic headwinds, CHDN delivered record Q3 2025 net revenue and Adjusted EBITDA, supported by strong free cash flow generation and a commitment to reducing bank covenant net leverage below 4x in 2026, alongside consistent dividend growth and strategic share repurchases.
• Macroeconomic Headwinds & Regulatory Shifts: The company faces challenges from consumer hesitancy impacting lower-tier spending, increased competition in some regional markets, and regulatory changes (e.g., Louisiana HRM cessation), necessitating agile capital allocation and operational optimization.

The Enduring Legacy and Strategic Evolution of Churchill Downs

Churchill Downs Incorporated ($CHDN), with a heritage spanning over 150 years, has masterfully evolved from the steward of the iconic Kentucky Derby into a diversified entertainment powerhouse. Its core strategy consistently revolves around elevating the Derby experience and strategically expanding its gaming and wagering footprint across the United States. This dual focus leverages the unparalleled brand equity of the Derby while capitalizing on the growth of regional gaming and online wagering.

The company's strategic journey gained significant momentum in late 2022 with the acquisition of Colonial Downs Racetrack, marking a pivotal entry into the lucrative Virginia Historical Racing Machine (HRM) market. This was swiftly followed by the August 2023 acquisition of Exacta technology, a move that vertically integrated HRM system technology. This integration has been a foundational strength, enhancing the performance of CHDN's HRM venues in Kentucky and Virginia by optimizing gaming floors and reducing technology fees. Exacta also serves as a crucial business-to-business (B2B) component, providing technology services to third-party operators in states like Kentucky, New Hampshire, and Wyoming. This proprietary technology offers tangible benefits, such as more efficient data processing for betting, which can lead to more accurate odds calculation and a superior user experience in racing markets. It represents a high-growth, high-margin investment that delivers strong returns for shareholders.

Looking ahead, CHDN is actively pursuing the development of HRM-based electronic table games (ETGs). This initiative, which involves collaboration with key suppliers like Interblock, aims to offer a comparable suite of offerings to customers, bridging the gap with traditional Class III casino facilities. While acknowledging the regulatory and taxation challenges, management views ETGs as an "important frontier" that will enhance the guest experience and provide additional support for the horseracing industry. This technological roadmap is critical for CHDN to maintain its competitive moat and drive future growth in its gaming segments.

The broader industry landscape is characterized by a recognized shift in consumer behavior towards experiential events, a trend that directly benefits the Kentucky Derby. The increasing availability of online sports wagering across the U.S. is also seen as a positive development, expanding the potential customer base for Derby wagering. However, the industry also faces technological disruptions, such as the rise of AI in gaming, which could lead to more efficient data processing and dynamic betting options from competitors. CHDN's strategic positioning, therefore, balances its deep-rooted traditions with a proactive approach to technological innovation and market expansion.

Competitive Dynamics and Market Positioning

Churchill Downs operates within a dynamic and competitive landscape, facing off against both large, diversified gaming conglomerates and agile, digital-first wagering platforms. Key direct competitors include Caesars Entertainment (CZR), MGM Resorts International (MGM), DraftKings (DKNG), and Penn National Gaming (PENN).

CHDN's competitive advantage is rooted in its iconic brand, particularly the Kentucky Derby, and its specialized expertise in horse racing. This allows for higher pricing power for events and fosters strong customer loyalty, translating into stable, recurring revenue from wagering. For instance, the Derby's expanding national and global footprint, driven by on-site attendance, television and digital audiences, and social media engagement, attracts well-respected brands for sponsorships and licensing. In contrast, while competitors like Caesars and MGM boast larger, integrated resort portfolios and broader entertainment ecosystems, CHDN's niche focus on horse racing provides a unique value proposition and deep operational expertise in managing live racing events.

In the online wagering space, CHDN's TwinSpires platform directly competes with digital giants like DraftKings. While DraftKings often leads in innovation speed and user engagement with cutting-edge mobile features, CHDN differentiates through its integration of live racing content and historical data, offering a specialized experience for horse racing enthusiasts. The proprietary Exacta technology further bolsters CHDN's competitive standing by providing efficient data processing and system management for HRMs, a segment where CHDN holds a strong relative position. This specialized technology offers superior operational efficiency and a high level of service for both its own venues and third-party customers.

However, CHDN is not without its vulnerabilities. Its regional focus, particularly in gaming, can limit revenue diversification and increase susceptibility to local economic downturns, contrasting with the broader geographic reach of companies like Caesars and MGM. Furthermore, while Exacta provides a technological edge in HRMs, potential technological gaps in broader digital platforms compared to digital-first players like DraftKings could lead to slower innovation and higher customer acquisition costs in certain online segments. The company also contends with the persistent challenge of illegal gaming machines, particularly in Virginia, which management describes as a "whack-a-mole" issue requiring constant vigilance and enforcement.

Barriers to entry in CHDN's industries, such as stringent regulations, high capital requirements, and established brand networks, generally favor the incumbent. These barriers protect CHDN's market position and contribute to sustained margins, although they also benefit larger, scaled rivals. CHDN's strategy of owning its real estate for gaming assets provides a sense of stability and predictability, a differentiator from some competitors who opt for asset-light strategies.

Financial Performance and Operational Momentum

Churchill Downs Incorporated has demonstrated remarkable financial resilience and growth, delivering overall record net revenue and Adjusted EBITDA in the third quarter of 2025. For the three months ended September 30, 2025, net revenue increased by $54.50 million, reaching $683 million, while Adjusted EBITDA rose by $27 million to $262.30 million. This performance was largely driven by the Live and Historical Racing segment, which saw a $52.50 million revenue increase and a $23.40 million Adjusted EBITDA increase, marking its 21st consecutive quarter of record growth. The Wagering Services and Solutions segment also contributed significantly, with a $6.70 million revenue increase and a $3.50 million Adjusted EBITDA increase.

Over the nine months ended September 30, 2025, consolidated net revenue grew by $149.90 million to $2.26 billion, and Adjusted EBITDA increased by $35.70 million to $958.30 million. This growth was fueled by new property openings and expansions. The Live and Historical Racing segment's revenue surged by $125.10 million, benefiting from the opening of The Rose Gaming Resort in November 2024 and Owensboro Racing and Gaming in February 2025. Kentucky HRM properties, including Louisville and Northern Kentucky venues, delivered double-digit Adjusted EBITDA growth in Q3 2025, with margins collectively increasing over 3 points. In Virginia, The Rose Gaming Resort showed meaningful sequential growth in gross gaming revenues, and same-store Virginia HRM properties achieved a "best in class" combined 51% margin in Q3 2025.

The Wagering Services and Solutions segment's strong performance was primarily attributable to the Exacta business, which benefited from the growth of HRM operations in Kentucky and Virginia, as well as new third-party relationships. TwinSpires Horse Racing also saw increased revenue, notably from record Derby Week wagering.

The Gaming segment, however, experienced a $4.70 million revenue decrease in Q3 2025, primarily due to the cessation of HRM operations in Louisiana following a state Supreme Court ruling that deemed the 2021 Historical Horse Racing Act unconstitutional without a voter referendum. This led to an $85.10 million non-cash impairment charge for the Chasers gaming rights in New Hampshire, as the company shifted its expansion focus to the newly acquired Casino Salem project. Despite this, excluding the Louisiana impact, Adjusted EBITDA for wholly-owned gaming properties increased over $3 million, with margins up 1.1 points in Q3 2025. The Terre Haute Casino Resort in Indiana continues to perform well, with Q1 2025 margins in the top quartile for regional gaming properties. Consumer behavior in regional gaming has shown consistent strength from high-end and rated guests, though lower-end unrated play has exhibited some hesitancy due to macroeconomic uncertainties.

Strategic Initiatives and Growth Outlook

Churchill Downs is poised for continued growth, driven by a clear strategic roadmap centered on its core assets and expansion opportunities. The Kentucky Derby remains the "crown jewel," with five key growth catalysts expected to deliver "outstanding growth in 2026 and beyond." These include increasing ticketing revenue from premium experiences, a new NBC broadcast deal that will boost Adjusted EBITDA by $10 million in 2026 and feature primetime coverage for the Kentucky Oaks, growing wagering activity, expanding sponsorships, and strategic capital investments.

A significant capital project, "Victory Run," is planned for Churchill Downs Racetrack, with an investment of $280 million to $300 million. This new structure, to be completed by the 2028 Derby, will replace existing dated seating with premium hospitality offerings, including private suites, and is targeted to achieve a 20% unlevered Internal Rate of Return (IRR) by year three. This project, along with renovations of the Finish Line Suites and The Mansion (expected by 2026 Derby), underscores the company's commitment to enhancing the guest experience and optimizing revenue growth.

In the HRM segment, expansion continues with the Marshall Yards Racing and Gaming venue in Calvert City, Kentucky, on track to open in Q1 2026 with 250 HRMs. In Virginia, the Richmond HRM venue completed an expansion adding 450 incremental HRMs, and the Roseshire Gaming Parlor in Henrico County opened ahead of schedule in September 2025 with 175 games. The recently acquired 90% interest in the Casino Salem project in New Hampshire is a strategic entry into a highly attractive market. The company plans to develop a permanent venue with approximately 900 HRMs and 30 table games by 2027, investing $180 million to $200 million.

The Exacta technology business is expected to further expand, supporting a new third-party HRM property in Wichita, Kansas, opening in December 2025. The pursuit of HRM-based electronic table games (ETGs) is a key technological differentiator, aiming to provide a more comprehensive gaming experience.

Financially, the company anticipates cash flows from operations and its credit facility to adequately fund business operations and capital expenditures over the next twelve months. Project capital is expected to be $200 million to $240 million in 2025 and $160 million to $200 million in 2026, reflecting ongoing investments. The federal tax bill enacted on July 4, 2025, which made 100% bonus depreciation and a 30% EBITDA-based interest deduction limitation permanent, is projected to reduce cash taxes by $50 million to $60 million in both 2025 and 2026, significantly boosting free cash flow. CHDN maintains a disciplined capital management strategy, evidenced by a 7% increase in its annual dividend, marking the 15th consecutive year of increases, and strategic share repurchases. The company aims to reduce its bank covenant net leverage below 4x in 2026, from 4.1x at the end of Q3 2025.

Risks and Challenges

Despite a strong growth trajectory, Churchill Downs faces several pertinent risks. Macroeconomic uncertainty, including inflation and potential impacts from tariffs, has already led to the temporary pause of a planned multi-year $900 million Derby project in Q1 2025, citing unquantifiable cost increases in materials. This highlights the sensitivity of large capital projects to external economic factors. Consumer confidence and discretionary spending remain critical, with management noting "hesitancy" in lower-tiered or unrated play across its casinos, which could impact revenue streams.

Regulatory risks are also a constant factor. The recent ruling in Louisiana, which deemed the 2021 Historical Horse Racing Act unconstitutional without a voter referendum, resulted in the cessation of HRM operations in the state and a negative impact on 2025 Louisiana results. Furthermore, the ongoing "whack-a-mole" challenge of illegal gaming machines in Virginia requires continuous enforcement and vigilance, posing a persistent, albeit currently not material, threat to legitimate operations. Interest rate risk is another financial consideration, with a one-percentage point increase in the SOFR rate potentially reducing net income and cash flows from operating activities by $15 million, given the company's variable-rate debt.

Competition remains intense across all segments. While CHDN leverages its unique brand and specialized technology, it faces formidable rivals in regional gaming and online wagering. The company also monitors potential asset impairment risks, such as those historically associated with Presque Isle Downs and Casino, which could be exacerbated by future economic conditions.

Conclusion

Churchill Downs Incorporated stands at a compelling juncture, strategically leveraging its storied past to forge a dynamic future. The core investment thesis is firmly rooted in the company's ability to continuously reinvent and monetize its iconic Kentucky Derby experience while aggressively expanding its high-growth Historical Racing Machine and regional gaming footprint. The proprietary Exacta technology provides a crucial competitive advantage, enhancing operational efficiency and opening new avenues for growth, particularly with the anticipated rollout of HRM-based electronic table games.

Despite macroeconomic headwinds and specific regulatory challenges, CHDN's disciplined capital allocation, robust free cash flow generation, and commitment to deleveraging position it for sustainable long-term value creation. The company's proactive approach to managing risks, coupled with its strategic investments in premium experiences and technological innovation, underscores its potential to deliver superior shareholder returns. Investors should monitor the successful execution of its ambitious capital projects, the continued ramp-up of new HRM venues, and the progress in regulatory approvals for new gaming technologies, as these will be key determinants of CHDN's continued success in a competitive and evolving entertainment landscape.