By Steve Zorn
For the past two weeks, the financial news has been dominated by the GameStop saga: millions of small investors, sitting at home and linked by an internet chat board artificially driving up the price of a moribund video game retailer and, in the process, inflicting some severe financial pain on the hedge funds that had shorted (i.e., bet against) GameStop stock. What, if anything, does this have to do with racing?
As it turns out, there is some intriguing stock-market activity going on in the racing industry, at least in those relatively few racing companies that are publicly traded. The asset management fund BlackRock, Inc. has just bought into three of the largest publicly-traded firms that own race tracks – Churchill Downs, Inc., Boyd Gaming, and VICI Properties, taking anywhere from an 8% to a 12.5% stake. So why, we might ask, would a hugely successful financial company, one not known for its sentimentality, go long on racing?
Before answering that, let’s look at those publicly traded companies that are still involved in thoroughbred racing. There aren’t many of them. Some of the biggest players in the game, notably the Stronach Group (Gulfstream, Laurel, Pimlico, Santa Anita and Golden Gate), NYRA (Aqueduct, Belmont and Saratoga), and Keeneland are privately held companies or not-for-profit entities. Most other tracks are held by family companies (Tampa Bay Downs, Oaklawn, Delaware Park, Los Alamitos), privately held companies (PARX, Finger Lakes) or quasi-public or Indian tribal entities (Monmouth, Prairie Meadows, Remington Park, Lone Star). So, which companies are “public”, meaning their shares are traded on stock exchanges and their information is available from the Securities and Exchange Commission? Just four companies of any racing significance at all: Churchills Downs, Inc. (Churchill, Arlington, Fair Grounds, Turfway), Penn National Gaming (Penn National, Sam Houston, Mahoning Valley, Zia Park and Charles Town), Boyd Gaming (Evangeline, Delta Downs and Belterra), and VICI Properties (which owns the real estate under Mountaineer, Thistledown and Penn National, but doesn’t actually operate any of the tracks). There’s one additional public company, the single-track entity that operates Canterbury Park in Minnesota, but that’s a very low-profile operation by stock market standards.
What do the four larger publicly traded racetrack companies have in common? They’re mostly not about horse racing. The best-known, Churchill Downs, Inc. (CDI), has over the past two decades transformed itself into a casino and online-betting operation that just happens to run a few marginally profitable race tracks, which it’s selling off as fast as it can (Hollywood Park, Calder, and, soon, Arlington). Boyd Gaming and Penn National are predominantly casino companies that hold onto their tracks primarily in order to retain the associated casino licenses. And all three are looking for ways to expand into sports betting as that market expands state by state. VICI is just a real estate holding firm that, because it emerged as part of the Caesar’s bankruptcy a few years ago, holds mostly gambling-related assets, a few of which happen to be race tracks.
Compared to the Stronach Group, which accounts for more than 30% of US thoroughbred handle, and to NYRA, with about 20% of national handle, none of these four companies are racing powerhouses. Contrary to what one would expect, given that a track owned by CDI hosts the Kentucky Derby, total handle on CDI’s tracks is not quite $1 billion a year, or less than 10% of the national total. The other companies account for far less.
But, from a stock market point of view, these companies are doing very, very well. And the less they have to do with racing, it seems, the better they do. As CDI disengages from racing, its stock price has soared, from less than $50 a share five years ago to more than $200 at the close of business yesterday. Penn National, which bought into the sports wagering operation Barstool Sports, and which raised over $1 billion in public stock offerings last year, is trading at about $110 a share, more than eight times where it was five years ago; it’s the only one of these four public companies in which BlackRock, as yet, has not taken a major stake, though another corporate investment company, the Fidelity mutual-fund group, does own more than 5%. Boyd Gaming is selling at about $48 a share, a mere three times its price of five years ago. And VICI Properties, which doesn’t operate tracks or casinos but owns the land underneath them, is trading around $27 a share, a 50% increase in the past five years. By way of comparison, in that same five-year period, the S&P 500-stock index, the broadest measure of the stock market as a whole, has almost exactly doubled. So, two of the three stocks that BlackRock has bought into -and the one it hasn’t – have been outperforming the market. But does that make them sensible buys?
The traditional way of looking at a stock’s value is its price-earnings (P/E) ratio; that is, how many times the price exceeds annual per-share earnings. Historically, looking back some 50 years or more, the average P/E ratio for the market has tended to be just under 20/1. P/E ratios are higher for companies that are expected to grow rapidly, typically those in new technologies, and lower for “mature” industries like utilities or, until recently, banks. So, for example, the average P/E ratio for tech companies has tended to be 40/1 or higher, while banks typically have a P/E ratio of 10 or less. How do BlackRock’s racing targets measure up on this metric? We’ll use 2019 earnings as a guide, both because the companies haven’t yet reported for 2020 and because earnings for 2020, disrupted by the COVID pandemic, are probably not typical.
In 2019, CDI earned $3.49 a share. At its current stock price of $204, that’s a P/E ratio of 58/1. Boyd Gaming, whose $48 share price and earnings per share of $1.39 for 2019 add up to a P/E ratio of “only” 35, not quite twice the historical norm. VICI Properties is not really in the gambling business; they make their money in the form of rents for their real estate. Their share price has hovered around $26 recently, which, on 2019 earnings of $1.25 a share, is a P/E ratio of just over 21/1. Penn National is the outlier here, with a P/E ratio that puts it in the GameStop league; perhaps that’s why it’s not on BlackRock’s buy list. Penn National’s 2019 earnings were only 38 cents a share, so at a $110 market price, that’s an absurdly high P/E Ratio of 289/1, though it appears that earnings for 2020 will be somewhat better.
It’s probably safe to say that the very smart folks at BlackRock are not buying CDI, VICI and Boyd because they’re bullish on the future of horse racing. All three companies are about other forms of gambling, whether it’s slot machines, brick-and-mortar casinos, sports wagering or online platforms like CDI’s Twin Spires. And the fact that they’re buying into these companies when their P/E ratios are somewhat above historical norms suggests that BlackRock expects stock prices to go even higher. BlackRock may see gambling as a whole, and especially its online forms, as a growth industry, or, perhaps more likely, it sees casino and race track real estate as a good bet. The fact that these companies happen to own or operate a few race tracks is, apparently, purely coincidental.