For Immediate Release
Chicago, IL – June 20, 2019 – Zacks Equity Research Shares of Churchill Downs Incorporated CHDN as the Bull of the Day, Monarch Casino and Resort MCRI as the Bear of the Day. In addition, Zacks Equity Research provides analysis on Shake Shack Inc. SHAK, McDonald's Corp. MCD and Restaurant Brands International Inc. QSR.
Here is a synopsis of all five stocks:
Bull of the Day:
People like to gamble.
Though the legal wagering industry in the US has been hindered by a host of moral and ethical concerns and an inconsistent patchwork of regulations, the tide is clearly turning, and there has been a significant expansion of legitimate options for placing wagers.
Almost everyone is familiar with the Churchill Downs Incorporated as the home of one of the most popular and profitable sporting events in the world – the Kentucky Derby Horse race. Tens of millions of people tune into the “Run for the Roses” each May. It’s so famous that simply watching on TV – whether or not you choose to wear a fancy hat – is basically a rite of passage.
What’s less recognized is that in addition to the most famous track in the world, the CHDN company owns and operates four other tracks, six casinos, numerous OTB facilities in which horse racing fans can bet on far away races, and – most importantly – TwinSpires.com, the biggest online wagering business in the US.
Churchill Downs has been coy so far about their plans for expanding online wagering, and with good reason, it wouldn’t make sense to advertise that you’re the leader in activity that remains in a moral and legal grey area.
If the regulations regarding betting on sports become clearer, it’s easy to envision Churchill Downs’ revenues from technology and infrastructure they’ve already developed – but can finally deploy on a serious scale – will explode.
In May of 2018, the Supreme Court decided 6-3 that the regulation of sports gambling should be left up to individual states, significantly reducing the hurdles that an inconsistent patchwork of laws had placed in the way of legal sports wagering in most jurisdictions.
The case that the court decided was a challenge to a 1992 federal law that disallowed most states from permitting legal sports betting. The Professional and Amateur Sports Protection Act (PASPA) prohibited states from establishing or allowing betting on sporting events, but allowed for “grandfather” provisions that allowed four states to continue licensing and taxing sports gambling operations – most notably Nevada which has been allowing sports betting since the 1940s.
Though it’s impossible to exactly quantify the amount Americans are betting illegally on sports, the most accurate estimates are that something in the area of $150 billion is wagered each year on professional sports and high-level amateur competitions - like the NCAA tournament.
As tends to be the case when any (previously restricted) activity goes mainstream, there are a wide range of options for consumers. In keeping with the tradition of their iconic namesake facility, Churchill Downs has chosen to address the high end of the market.
Their state-of-the-art Derby City casino, opened in the Fall of 2018, is Louisville’s only legal gaming facility and features 900 gambling machines in 70 different themes as well as two locally-inspired restaurants and a vast gaming bar and outdoor patio, all spread over 85,000 square feet.
Derby City is only one of Churchill Downs’ physical facilities, but it’s an important testament to the company’s strategy. In an environment that is bound to include an increasing amount of options for gaming customers, CHDN has correctly surmised that those customers don’t simply want to make bets; they also want an all-inclusive entertainment experience that includes dining, music and other amenities.
Named after the distinctive architectural profile of the racetrack itself, TwinSpires.com is Churchill Downs’ online portal for wagering. Offering gamblers the opportunity to watch high-resolution live video from five tracks, up-to-the-minute odds, handicapping data and access to all sorts of wagers – from the traditional “win-place-show” tickets as well as a wide array of more exotic bets.
It’s a quick and efficient interface that Churchill Downs describes as like “having your own OTB.” Even more importantly, it’s a foothold in what is likely to be the future of online gaming. There will probably always be some demand for physical racetracks or casinos for gamblers to visit in person, but the economies of scale afforded by internet gambling will someday massively eclipse the in-person wagering business.
Churchill Downs is already positioned to expand as much as the (constantly evolving) laws allow.
The beauty of Churchill Downs right now is that their existing businesses are popular and profitable. The potential for the expansion of sports betting to wider online audiences is basically a free call option.
The Zacks Consensus Estimate for 2019 net earnings has risen from $3.88 to $4.40/share in the past 60 days, earning CHDN a Zacks Rank #1 (Strong Buy).
Bear of the Day:
Today’s Bull of the day is the gaming giant that parlayed its reputation as the most famous horseracing venues in the world – and the home of the Kentucky Derby. In addition to having premium product offerings, that company is ideally positioned to take advantage of its presence in the online gaming market.
The gaming market continues to evolve
It’s exactly that type of pressure that makes Monarch Casino and Resort our Bear of the Day. The company operates two more traditional casino properties in markets that not only aren’t growing, they’re losing market share to more innovative competitors.
With the Atlantis Casino in Reno Nevada and the Monarch Casino in Blackhawk, CO (40 miles west of Denver in a former mining town), Monarch Casino & Resorts is positioned at the low-end of the spectrum of gambling options.
Nevada Gaming operations used to enjoy a built-in competitive advantage because they were really the only state that widely allowed casinos and people from all over the country traveled to wager and stay at those properties.
The widespread proliferation of other options across the country – including Native-American owned casinos as well as riverboat gaming operations means that most Americans have access to Casino gambling without the long trip to Nevada.
The high profile Las Vegas resorts reinvented themselves as eclectic entertainment centers that included gambling, but also offered other entertainment options like waterparks, live entertainment and spas. They’ve kept up the number of tourist visits by offering more reasons to come.
The best gaming companies are also building and maintaining a strong internet presence – which will be especially valuable as regulations regarding sports wagering continue to relax.
Smaller gaming properties tend to be more economically sensitive, with results fluctuating with the financial situation of their local audiences. When people are feeling relatively wealthy, they tend to enjoy luxuries like gaming. When things are tighter, trips to the casino are an easy recreational option to jettison.
Monarch Casino & Resort has been showing anemic, single-digit growth in revenues lately and declining net earnings, even in an economic climate that includes record-low unemployment and interest rates and rising wages and GDP.
These should be the best possible times for a casino operator, and Monarch’s unimpressive results show that the company could be in real trouble in an economic downturn.
Recent net earnings estimates have been falling, with the Zacks Consensus Estimate for the current quarter dipping 10% in the last 90 days to $0.43/share. Full year estimates have fallen by a similar amount, from $2.08/share to $1.89.
Those net earnings still leave MCRI at a forward P/E valuation of 22.5X, well in excess of the industry average and the S&P 500.
Thanks largely to those reduced estimates, Monarch Casino & Resorts is currently a Zacks Rank #5 (Strong Sell).
Shake Shack (SHAK) Going Global: Food for Thought?
In a classic example of following a rather unconventional path to fuel its growth engine, popular ‘roadside’ burger brand Shake Shack Inc. has chalked a global strategy of international expansion to better connect with its consumers worldwide. The company recently decided to open a new store in Mexico City, Mexico, to take its international footprint tally to 16 – a remarkable achievement for a relatively young establishment that turns 15 this summer.
What makes this expansion strategy all the more unique is the fact that the company opened restaurants in London, Istanbul, Dubai and Moscow before it reached Los Angeles in 2016. Altogether, Shake Shack currently operates about 235 restaurants across the globe with annual revenues of $459.3 million in 2018.
David vs. Goliath?
Despite significant international presence, Shake Shack appears to be lagging way behind its rivals in terms of number of operating restaurants. By the end of 2018, McDonald's Corp. had nearly 38,000 restaurants worldwide, while Restaurant Brands International Inc.’s iconic brand Burger King operated nearly 18,000 restaurants. In 2018, McDonald’s and Burger King recorded annual revenues of $21,025 million and $1,651 million, respectively.
However, in spite of the skewed-up numbers, Shake Shack seems to be a force to reckon with, generating 27.3% year-over-year growth in estimated U.S. system sales per 2019 Top 200 research. The company also remains poised to claim a position in the top 3 fast-casual chain operators ranked by Latest-Year growth in U.S. systemwide sales.
The Success Recipe
The penchant for international expansion appears to be the primary driving force that has helped Shake Shack to punch above its weight. Most U.S. companies usually tend to strengthen their regional presence to gain key insights about customer behavior and consumption patterns before foraying into foreign shores with different culinary tastes and cultures. However, Shake Shack has chosen the offbeat path to success as a way of hedging – cashing in on the fact that if anything went wrong in foreign territories, it would hardly have any impact on local business.
The company uses local licensing companies to run stores in foreign locations. Although the core menu remains broadly similar, it tries to add a local twist without compromising on its brand image. Shake Shack mostly prefers to use American ingredients in international locations to remain true to its distinct taste. In situations where it fails to procure the raw materials from U.S. suppliers due to supply constraints or trade tariffs, the company sources the items from local vendors, thus offering it an opportunity to engage more with the community. When a particular menu item with a local flavor becomes a huge hit, Shake Shack tries to introduce it in the U.S. market to replicate the success story.
Being a relatively small firm, Shake Shack is quite nimble, and quickly adapts to the evolving market conditions and usually turns every possible disadvantage in its favor. Moreover, as the international operations are mostly licensed, it requires comparatively less capital than the bulk of the domestic business. The company also aims to tap the huge footfall in international airports to better connect with diverse customer base. This has further created significant customer interests and generated wide publicity through word of mouth and point-of-purchase display.
The combination of all these factors seem to be working for Shake Shack as it braces for cut-throat competition with respect to price, service, and healthier menu options. Total revenues for the company in the first quarter of 2019 improved 33.8% year over year to $132.6 million. The stock has recorded average return of 45.9% year to date compared with the industry’s rally of 20.8%.
The company is betting big on extending its international footprint and plans to open 16 to 18 licensed stores this year with an emphasis on expanding in China, Singapore, the Philippines and Mexico. CEO Randy Garutti perfectly summed up, "So much of this story has been our global story. What we learned early on is that people don't want us to be a local version of Shake Shack. They want us to be Shake Shack. So that's what we do."
Food for thought for the rivals?
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Monarch Casino & Resort, Inc. (MCRI) : Free Stock Analysis Report
Churchill Downs, Incorporated (CHDN) : Free Stock Analysis Report
Restaurant Brands International Inc. (QSR) : Free Stock Analysis Report
Shake Shack, Inc. (SHAK) : Free Stock Analysis Report
McDonald's Corporation (MCD) : Free Stock Analysis Report
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