Churchill Downs Results and Headlines - The Folly of Forecasting and Related Flow of Information

We briefly wanted to share an example of inaccurate forecasting and related information in the Market. Churchill Downs (CHDN) reported 1Q10 results this afternoon and headlines are reporting a large miss -from "In-Play":

• 4:33PM Churchill Downs misses by $0.13, misses on revs (CHDN) 37.88 -0.45 : Reports Q1 (Mar) loss of $0.65 per share, $0.13 worse than the Thomson Reuters consensus of ($0.52); revenues rose 1.9% year/year to $75.1 mln vs the $79.2 mln consensus.

Yet, from Churchill's release today (emphasis added):

• Net revenues from continuing operations for the first quarter of 2010 totaled a record $75.1 million, an increase of 2 percent over net revenues from continuing operations of $73.7 million recorded during the first quarter of 2009. Net revenues from continuing operations for the quarter were positively affected by revenue from the newly opened Calder Casino and revenue growth at TwinSpires.com, offset by the non-recurrence of $4.3 million in source market fee revenue that had been received by Arlington Park in the first quarter of 2009.

To confirm the positive boost in 1Q09 - from Churchill's release one year ago:

• Net revenues from continuing operations for the first quarter of 2009 totaled $73.7 million, an increase of 12 percent over net revenues from continuing operations of $65.7 million recorded during the first quarter of 2008. Net revenues from continuing operations for the quarter were positively affected by the continued strong first quarter performance of the Company’s gaming operations in Louisiana, which opened its permanent facility in November 2008, as well as the continued growth of its on-line businesses, including TwinSpires.com. Additionally, we benefited from the receipt of $4.3 million in one-time source market fees paid to Arlington Park, previously held in escrow by the National Thoroughbred Racing Association (“NTRA”), during the first quarter of 2009.

Sure enough, the one-time boost should not have been included in the consensus estimate. Okay, maybe it wasn't. Perhaps the estimate truly expected revenue from continuing operations to increase 7% Y/Y, especially with the launch of the Calder Casino. Yet, we know the core business -- the majority of Churchill's revenue -- remains under pressure. Handle data from Bloodhorse.com (reported in early April):

• Wagering on United States races was down 10.35% for the first three months of 2010 when compared with the same period a year ago, but handle in March rebounded considerably from a month earlier. According to the Thoroughbred Racing Economic Indicators released April 5 by Equibase, handle in March totaled $998,775,323, down 6.21% from $1,064,949,906 in March 2009. February 2010 handle was $869,807,865, down 13% from the same month in 2009, in part because of a reduction in race days.

Thus, with industry handle down 10% in 1Q10, achieving 7% Y/Y growth would have been a highly unlikely miracle. Delivering +2% Y/Y isn't bad, in our view. We suspect the consensus estimate may simply have been based on the year ago figure including the one-time benefit (*if we back out the $4.3 million from the $79.2 million estimate, we have $74.9, just below the $75.1 million reported today) . Of course, Churchill has a number of moving pieces and it's hard to know what was included in the consensus number.

Forecasting is difficult and "experts" are often wrong (please see slide 11 at this link -- we'll come back to this theme in coming months). But, wait: there's one other problem with the consensus estimate: per Yahoo Finance, it includes only one analyst estimate and, therefore, is by no means a "consensus" estimate. Nonetheless, more than a handful of investors, traders, and media sources may well base their analysis, decisions, and reporting on this number. Scary, right? Yes, but this is how the Market works -- or does not work -- often creating opportunities for diligent analysts.

In other news - also from today's release:

• [CEO] Evans continued, "CDI's Online Business revenues grew 8 percent in the quarter, primarily due to an 8 percent increase in handle recorded by TwinSpires.com. The Company's pending acquisition of Youbet.com, Inc. continues to proceed through the U.S. Department of Justice's review process, with a second quarter 2010 closing of the transaction still anticipated."

We continue to wait for the official stamp of approval as our shares of Youbet.com (UBET) remain at a wide discount to the implied purchase value if the deal were to close tomorrow.

Happy investing,

Jeffrey Walkenhorst
CommonStock$ense

Disclosure: long UBET.
© 2010 Jeffrey Walkenhorst
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