Chruch Ill Downs

Completed
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MEDIA 2018 02:10 PM EDT
Disseminated 27 Apr 2018 03:26 PM EDT
North America Equity Research
27 April 2018
Neutral
Churchill Downs CHDN, CHDN US
Price: $274.00 (intraday - 02:30 PM)
1Q18 Takeaways; Casinos Segment Impressive; ▲ Price Target: $280.00
Remain Neutral on Valuation; PT to $280 Previous: $270.00
CHDN posted better than expected 1Q results, primarily reflecting upside in the Gaming & Lodging
company’s Casinos segment. Total adjusted EBITDA of $49.2m topped our $44.5m AC
Daniel Politzer, CFA
and consensus’s $45.0m, as Casinos EBITDA of $44.3m came in $7.1m above our (1-212) 622-8170
estimate. We come away impressed with the 480 bps y/y improvement in wholly dan.politzer@jpmorgan.com
owned Casinos margin, which we believe was driven by the company’s more efficient Joseph Greff
marketing/promotions (a similar theme among industry peers) and a cost structure that (1-212) 622-0548
was flexed down during slower/weather impacted periods. Management also noted joseph.greff@jpmorgan.com
that higher end customers have been making more frequent trips to their properties, Brandt Montour, CFA
and that all but one of the company’s casinos increased market share and adj. EBITDA (1-212) 622-1111
brandt.a.montour@jpmorgan.com
y/y in the 1Q. Elsewhere, TwinSpires revenue growth remained strong at +22% y/y,
Omer N Sander
with one-third coming from organic growth, two-thirds from the BetAmerica
(1-212) 622-2684
acquisition which will anniversary this April. With Big Fish in the rear view, CHDN’s omer.n.sander@jpmorgan.com
1Q showcased the company’s strong execution in its existing businesses, while the J.P. Morgan Securities LLC
strong balance sheet provides dry powder for the company to evaluate “M&A
opportunities that fit [its] profile,”. We remain Neutral here on valuation as CHDN Price Performance
trades at the high end of our coverage universe (13.7x 2018E EBITDA and 5.5% 260
discretionary FCF yield), and raise our price target to $280 (+$10) primarily on higher 220
$
estimated Casino EBITDA/margin.
180
 Free Cash Flow. We model discretionary FCF of $208m for 2018E and $221m for 140
2019E. Given CHDN’s strong balance sheet (net leverage of ~2.3x) and free cash Feb-17 May-17 Aug-17 Nov-17 Feb-18
CHDN share price ($)

flow generation, we see balanced opportunities for the company to return capital via RTY (rebased)
share repurchases and also spend/invest strategically, via additional instant racing YTD 1m 3m 12m
facilities (~$90m), regional casino M&A, and Derby project capex/upgrades. Abs 7.7% -0.9% 17.8% 67.7%
Rel 8.6% 3.0% 16.3% 58.6%
 1Q Recap. EBITDA of $49.2m came in better than our $44.5m on higher Casinos
EBITDA, which topped our estimate by $7m. Revenue of $189 similarly topped our
$179m, reflecting higher Casino revenues. Total Casinos revenues were $98.1m
(+12% y/y), driven by growth at Oxford (new hotel), Calder (competitor remains
closed), and Riverwalk (up an impressive 25% y/y). Wholly owned performance was
impressive, with revenue increasing $10.6m year-over-year, or 12%, and wholly
owned EBITDA increasing $7.8m, year-over-year, or 25%. TwinSpires revenue
increased 22% y/y to $63.6m (2/3 of growth from BetAmerica, 1/3 organic), while
EBITDA increased to $16.5m. Margin of 25.9% was below our 27.5% estimate.
Racing revenue of $26.2m was in line with our estimate, though EBITDA of -$9.4m
was below our estimated -$6.7m. We note Racing is not seasonally important in the
1Q. See Figure 1.
Churchill Downs Inc. (CHDN;CHDN US)

FYE Dec 2016A 2017A 2018E 2018E 2019E 2019E Company Data
(Prev) (Curr) (Prev) (Curr) Price ($) 274.00
Adj. EBITDA ($ mn) Date Of Price 27-Apr-18
Q1 (Mar) 47 57 44 49A - - 52-week Range ($) 285.70-162.25
Q2 (Jun) 160 173 163 168 - - Market Cap ($ mn) 4,247.00
Q3 (Sep) 71 76 60 62 - - Fiscal Year End Dec
Q4 (Dec) 57 38 42 44 - - Shares O/S (mn) 16
FY 335 344 310 324 332 348 Price Target ($) 280.00
Source: Company data, Bloomberg, J.P. Morgan estimates. Price Target End Date 31-Dec-18
See page 14 for analyst certification and important disclosures.

J.P. Morgan does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that
the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single
factor in making their investment decision.
www.jpmorganmarkets.com
This document is being provided for the exclusive use of SUE RADLAUER at FORBES MEDIA LLC
Daniel Politzer, CFA North America Equity Research
(1-212) 622-8170 27 April 2018
dan.politzer@jpmorgan.com
 Updating estimates. Our 2018E and 2019E EBITDA go to $324m and $348m,
respectively. The delta is entirely driven by Casinos, where we model continued margin
improvement and a strong regional gaming customer. We estimate discretionary free
cash flow of $208m for 2018E and $221m for 2019E. We note our estimates do not
include any contribution from CHDN’s two pending casino acquisitions (Vicksburg and
Presque Isle), nor any contribution from its partnership with the Keeneland Association
to build two additional historical horseracing facilities.
 Our year end 2018 price target goes to $280 on higher Casino EBITDA. Our
valuation is based on a SOTP approach, where we ascribe 16.0x to 2019E Derby
EBITDA, 9.0x to 2019E Casino EBITDA, and 10.0x to 2019E TwinSpires EBITDA,
plus an NPV for the historical horseracing facility (~$5 per share), less corporate
expense and 2019E end of period net debt. We note our valuation also includes option
value for Arlington (~$11) and Calder tracks ($2), and we assign ~$12 of value to
CHDN’s pending casino acquisitions. We note that in our valuation, we value the
Kentucky Derby independently of CHDN’s other racing operations, netting the modest
negative track EBITDA (estimated) at CHDN’s Calder and Fair Grounds racinos
against Casino EBITDA.
 Embedded Value in Arlington and Calder Track/Land. We assign $11 of value to

Arlington Park, CHDN’s track located in the Chicago market. Our valuation
contemplates a 15% chance of gaming legislation passing (we value a casino there at
$19/share), and in the event that legislation does not pass (we assign 85% probability),
we estimate the land could be sold in a transaction that could be worth $12/share. Given
the uncertainty on gaming legislation passing/ unclear timing as to when CHDN could
sell the land, we discount the weighted value of these outcomes by 20%. See Figure 3.
For Calder, we assign $2 of equity value, CHDN’s track located in South Florida. Our
valuation contemplates a 33% chance of a decoupling scenario, where the casino could
be run without existing racing operations. In a decoupling scenario, we believe CHDN
would look to sell the 170 acres of remaining land and terminate its lease with the
Stronach Group, who currently manages the racing operations. Given the uncertainty on
decoupling legislation, we assign a 33% probability. See Figure 4.
 Read on. Our valuation work, easy-to-read charts, and detailed model are attached in
the body of this note.
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(1-212) 622-8170 27 April 2018
Figure 1: CHDN 1Q18 Results Summary

$ in millions
($MM, except per share data) CHDN Actual JPM Estimates

YOY Chg Variance
Net Revenues: 1Q18 1Q17 $ % 1Q18E $ %
Racing 26.2 26.1 0.1 0.4% 26.0 0.2 0.9%

Casinos 98.1 87.5 10.6 12% 90.5 7.6 8%
TwinSpires 63.6 52.3 11.3 22% 61.9 1.7 3%
Big Fish 0.0 0.0
Other Investments 5.5 5.5 0.0 0% 5.5 0.0 0%
Corporate (4.1) (3.9) (0.2) NM (5.0) 0.9 NM
Total Net Revenues 189.3 167.5 21.8 13.0% 178.9 10.4 6%
EBITDA:
Racing (9.4) (9.7) 0.3 -3.1% (6.7) (2.7) 39%
Margin -35.9% -37.2% 1.3% -26.0% -9.9%
Casinos 44.3 35.3 9.0 25% 37.2 7.1 19%
Margin (includes JV EBITDA) 45.2% 40.3% 4.8% 41.1% 4.1%
Wholly Owned Casino Margin 33.9% 29.1% 4.8% 29.4% 4.6%
TwinSpires 16.5 13.2 3.3 25% 17.0 (0.5) -3%
Margin 25.9% 25.2% 0.7% 27.5% -1.6%
Big Fish 0.0 0.0
Margin (as % of Bookings) 0.0% 0.0%
Other Investments 0.3 0.6 (0.3) NMF 0.0 0.3 NM
Corporate (2.5) (3.1) 0.6 NMF (3.0) 0.5 -17%
Adjusted EBITDA 49.2 36.3 12.9 35.5% 44.5 4.7 11%
Margin 26.0% 21.7% 4.3% 24.9% 1.1%
FAS 123 Expense (6.1) (5.3) (0.8) 15%

Depreciation and Amortization (13.8) (14.0) 0.2 -1%
Big Fish Deferred Revenue and Adjustments 0.0 0.0 0.0
Other/Miscellaneous 1.4 (5.0) 6.4 NM
Operating Income 19.7 20.2 (0.5) -2%
Net Interest Expense (9.6) (12.3) 2.7 -22%

Equity in income of unconsolidated investments 6.5 5.0 1.5 NM
Other 0.1 0.0 0.1 NM
Income Before Taxes (continuing operations) 16.7 12.9 3.8 NM
Provision for Taxes (2.6) (3.2) 0.6 NM

Tax Rate 16% 25% N/A N/A
Net Income (Loss) from continuing ops 14.1 9.8 4.3 NM
Adjusted Net Income 15.8 9.8 6.0 NM
Adj. EPS $1.09 $0.68 $0.41 NM
Fully Diluted Shares Outstanding 14.5 14.4 0.1 1%

Note: 1Q17 results are shown excluding Big Fish, which CHDN has since sold.
Source: Company reports and J.P. Morgan estimates.
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CHDN in Process of Acquiring Two Casino Properties for

$229.5m
Recall, with its 4Q earnings release, CHDN announced plans to acquire two Casinos
from ERI for $229.5m, including Presque Isle Downs (Erie, PA) for $178.9m and
Lady Luck Casino (Vicksburg, MS) for $50.6m. We estimate these transactions add
~$12 per share, ascribe a 9x FCF multiple for Presque and 8x FCF multiple for
Vicksburg. Vicksburg is expected to close in the 2Q18, and Presque Isle, whose
closing is conditioned on Vicksburg’s closing, is expected to close in the 4Q18.
In aggregate, the transaction represents a multiple of ~8.8x aggregate TTM EBITDA

(~$26m), or 8.2x net of cage cash, a transaction multiple we view as fair, in the
current environment. CHDN anticipates synergies of $1.1m, further reducing the
multiple to 7.9x (net of cage cash).
CHDN noted both properties are in relatively good shape. For Vicksburg, this is a
property adjacent to CHDN’s Riverwalk property (they share a parking lot), so there
is opportunity for some synergies/shared services between the properties. At Presque
Isle Downs, it does 100 racing days a year, so CHDN could add some value there,
and while the property is well run, what interests CHDN most in this property is it
allows it to strategically start participating/building its capabilities in the online
gaming space in PA, which has 13 million people.
Presque Isle generated $140m of revenue and $19m of EBITDA in 2016 and has
1,600 slots and 32 table games. Lady Luck Vicksburg generated $32m of revenue
and $9m of EBITDA in 2016 and has 620 slots, 9 table games, and an 89-room hotel.
Figure 2: We Estimate CHDN’s Casino Acquisitions Add $12 Per Share

$ in millions
Presque Vicksburg Total
EBITDA $18 $8 $26
Cash tax benefit $1 $1 $2
Interest ($3) ($2) ($5)
Capex ($3) ($2) ($5)
FCF 13 6 19
FCF Multiple 9.0x 8.0x 8.7x
Value 117 44 161
S/O 13.6 13.6 13.6
Value/Share $9 $3 $12
Source: J.P. Morgan estimates.
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Embedded Value in Arlington and Calder Track/Land

We assign $11 of value to Arlington Park, CHDN’s track located in the Chicago
market. Our valuation contemplates a 15% chance of gaming legislation passing (we
value a casino at $19/share), and in the event there it does not, we estimate the land
could be sold in a transaction that could be worth $12/share. Given the uncertainty on
gaming legislation passing/ unclear timing as to when CHDN could sell the land, we
discount the weighted value of these outcomes by 20%. See Figure 3.
Figure 3: We Assign ~$11 of Equity Value to Arlington Park Gaming/Land Sale Scenarios
$ in millions except per share values
Arlington Park Gaming Scenario
Days in Period 365 365 365
Number of Slots 1,200 1,200 1,200
Win/unit/day $300 $350 $400
Gross Slot Games Revenue ($ millions) $131 $153 $175
F&B and Other Revenue $15 $15 $15
Total Gross Revevnues $147 $169 $191
Less: promotional allowance (assume 5%) $7 $8 $9
Net revenues $140 $161 $182
Margin % 30% 30% 30%
Total Property EBITDA $42 $48 $55

Multiple 9.0x 9.0x 9.0x
Total Value $378 $435 $491

Less: Investment ($175) ($175) ($175)
Equals Net Value $203 $260 $316
Shares 13.6 13.6 13.6
Incremental value per share $15 $19 $23
Arlington Park Sale Scenario
Acres 336 336 336 336 336 336 336 336

Price per acre ($ millions) $0.450 $0.550 $0.650 $0.750 $0.850 $0.950 $1.000 $1.050
Sale Price ($ millions ) $151 $185 $218 $252 $286 $319 $336 $353
Book Value (estimate) $100 $100 $100 $100 $100 $100 $100 $100
Gain on Sale $51 $85 $118 $152 $186 $219 $236 $253
Tax (15%) $8 $13 $18 $23 $28 $33 $35 $38
Proceeds $44 $72 $101 $129 $158 $186 $201 $215

Shares 13.6 13.6 13.6 13.6 13.6 13.6 13.6 13.6
Incremental value per share $3 $5 $7 $9 $12 $14 $15 $16
Net Arlington Value

Gaming Scenario $19
@ 15% $4
Land Sale Scenario $12

@ 85% $9
Total Arlington Value $13

Discount rate 20%
Arlington value $11
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We assign $2 of equity value to Calder, CHDN’s track located in South Florida. Our
valuation contemplates a 33% chance of a decoupling scenario, where the casino
could be run without existing racing operations. In a decoupling scenario, we believe
CHDN would look to sell the 170 acres of remaining land and terminate its lease
with the Stronach Group, who currently manages the racing operations. Given the
uncertainty on decoupling legislation, we assign a 33% probability. See Figure 4.
Figure 4: We Assign ~$2 of Equity Value to Calder

$ in millions except per share values
Calder Land Sale Scenario
Acres 170 170 170 170 170 170 170 170
Price per acre ($ millions) $0.450 $0.550 $0.650 $0.750 $0.850 $0.950 $1.000 $1.050
Sale Price ($ millions ) $77 $94 $111 $128 $145 $162 $170 $179
Book Value (estimate) $60 $60 $60 $60 $60 $60 $60 $60
Gain on Sale $17 $34 $51 $68 $85 $102 $110 $119
Tax (15%) $2 $5 $8 $10 $13 $15 $17 $18
Proceeds $14 $28 $43 $57 $72 $86 $94 $101

Shares 13.6 13.6 13.6 13.6 13.6 13.6 13.6 13.6
Incremental value per share $1 $2 $3 $4 $5 $6 $7 $7
Calder decoupling scenario

Land Sales
Net Proceeds $86
Shares 13.6
Total Value $6
Probability 33%
Calder Value $2
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Derby City Gaming

In June 2017, CHDN announced it will be investing $60m to build a 600-unit
historical racing machine (HRM) facility in Louisville, which is planned to open in
the 3Q18. Historical horse racing machines are similar in physical appearance to
VLTs or slots, though the outcome is determined by results of historical horse races.
We estimate that the facility in Louisville could be worth ~$5 per share, as we
assume 600 units could generate $225 in win/unit/day (using Horseshoe Southern
Indiana as a proxy, where slot win/unit/day is ~$300). Our full assumptions are
outlined below.
CHDN also is looking to build two additional facilities, as it has formed a partnership
with Keeneland Association (thoroughbred auction company) to propose
construction of two new facilities, one in Corbin, Kentucky (~75 minutes north of
Knoxville) and one in Oak Grove, Kentucky (~1 hour from Nashville). We expect
Oak Grove would likely be similar in size to Derby City, while Corbin would likely
be half that size, implying total capex could be ~$90m for the two properties if/when
they are built.
Figure 5: We estimate CHDN's Historical Horse Racing Facility is worth ~$5 per share
Bear Case Base Case Bull Case
Units 600 600 600
Win/unit/day $200 $225 $250
Days 365 365 365
Gross Revenue $ (millions) $43.8 $49.3 $54.8
Taxes $8.3 $9.4 $10.4

19.0% 19.0% 19.0%
Net Gaming Revenues $35.5 $39.9 $44.3

Other revneues $1.8 $2.0 $2.2
as % of total 5% 5% 5%
Total Revenues $37 $42 $47
EBITDA $13 $15 $16

as % of total 30% 30% 30%
Multiple 8.0x 9.0x 9.0x
EV ($ millions) $105.1 $133.0 $147.8
Less: cost ($millions) ($60.0) ($60.0) ($60.0)
Equity Value $45.1 $73.0 $87.8
Shares Outstanding 13.6 13.6 13.6

Equity Value $3.33 $5.39 $6.48
Accretion 1.2% 2.0% 2.3%
Source: State gaming control boards (ME, FL, LA), J.P. Morgan estimates.
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(1-212) 622-8170 27 April 2018
Investment Thesis, Valuation and Risks

Churchill Downs (Neutral; Price Target: $280.00)
Investment Thesis
With Big Fish in the rear view, CHDN’s 1Q showcased the company’s strong
execution in its existing businesses, while we believe the strong balance sheet
provides dry powder for the company to evaluate “M&A opportunities that fit [their]
profile”. We remain Neutral here on valuation as CHDN trades at the high end of our
coverage universe (13.7x 2018E EBITDA and 5.5% discretionary FCF yield), and
raise our price target to $280 (+$10) primarily on higher estimated Casino
EBITDA/margin.
Valuation
At current levels, CHDN trades at 13.6x 2018E EV/EBITDA and 11.9x 2019E
EV/EBITDA. This compares with its historical average 8.1x forward-year EBITDA
multiple and its historical EV/EBITDA range of 5.7x to 11.6x. We note our estimates
do not include the impact of CHDN's pending acquisition for Vicksburg and Presque
Isle.
CHDN Current Valuation

Market Net Enterprise Adjusted Adj. Net
Year Shares Out Cap Debt Value EBITDA EV/EBITDA Leverage
2019E 13.6 3,715 437.6 4,153 348 11.9x 1.3x
2018E 13.8 3,780 628.7 4,408 324 13.6x 1.9x
Year EPS P/E

2019E $12.40 22.1x 20.0x $248.06
2018E $10.81 25.3x
Year FCF/Share FCF Yield

2019E $16.31 6.0% 6.0% $272
2018E $15.10 5.5%
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(1-212) 622-8170 27 April 2018
CHDN Price Target Methodology

Fair Value
Segment 2019E EBITDA Multiple Firm Value
Kentucky Derby $111 x 16.0x = $1,779

Casinos (includes JVs and Derby City Gaming) $166 x 9.0x = $1,496
Racing (ex-Derby)/ Contra Casino EBITDA ($9) x 9.0x = ($82)
TwinSpires $75 x 10.0x = $755
Sub-total $344 x 11.5x = $3,948
Corporate ($10) x 11.5x = ($118)

Sub-total $334 11.5x $3,830
Less Year-end 2018E Net Debt, Less CIP $438
Plus: Equity Value from HHR Facility 73
Equals Equity Value 3,465
Divided by Diluted Shares Outstanding 13.6
Equals Equity Value Per Share $256
Plus Arlington Option Value $11
Plus Calder Option Value $2
Plus Presque/Vicksburg Acquisition Value $12
Equals Fair Value $280
Share Price $274.00

Upside / (Downside) Potential 2%
2018E Free Cash Flow per Share $15.36

Implied Discretionary 2018E Free Cash Flow Yield at current levels 5.6%
2019E Free Cash Flow per Share $16.31

Implied Discretionary 2018E Free Cash Flow Yield at current levels 6.0%
Our year end 2018 price target goes to $280 on higher Casino EBITDA. Our
valuation is based on a SOTP approach, where we ascribe 16.0x to 2019E Derby
EBITDA, 9.0x to 2019E Casino EBITDA, and 10.0x to 2019E TwinSpires EBITDA,
plus an NPV for the historical horseracing facility (~$5 per share), less corporate
expense and 2019E end of period net debt. We note our valuation also includes
option value for Arlington (~$11) and Calder tracks ($2), and we assign ~$12 of
value to CHDN’s pending casino acquisitions. We note that in our valuation, we
value the Kentucky Derby independently of CHDN’s other racing operations, netting
the modest negative track EBITDA (estimated) at CHDN’s Calder and Fair Grounds
racinos against Casino EBITDA.
Risks to Rating and Price Target

Upside risks to our estimates and price target include, but are not limited to, (1) a
potential sale of assets, such as Arlington Racetrack or other race track real estate, or
sooner-than-expected gaming expansion Illinois, and (2)
accretive/strategic/transformative M&A which investors view favorably.
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Downside risks to our estimates and price target include, but are not limited to, (1)
the US horseracing industry is competitive and declining in popularity; (2) the
company is sensitive to a severe downturn in consumer/gaming spend; and (3) is
subject to adverse gaming legislation.
Figure 6: CHDN EPS Model

$ in millions, except per share values
$ in millions, except per share data 2015 2016 1Q17 2Q17 3Q17 4Q17 2017 1Q18 2Q18E 3Q18E 4Q18E 2018E 2019E
Net Revenues :
Racing 262.2 268.1 26.1 175.7 41.9 32.9 276.6 26.2 191.6 41.3 32.3 291.5 297.3
yoy % growth 0.3% 2.3% (8.4%) 6.7% 1.5% (2.1%) 3.2% 0.4% 9.1% (1.4%) (1.8%) 5.4% 2.0%
Casinos 332.9 332.8 87.5 88.3 87.5 87.2 350.5 98.1 92.3 91.0 87.7 369.1 374.1
yoy % growth 1.4% (0.0%) 1.2% 4.6% 5.4% 10.5% 5.3% 12.1% 4.6% 4.1% 0.5% 5.3% 1.3%
TwinSpires 201.3 221.9 52.3 80.8 66.1 57.5 256.7 63.6 87.3 71.6 62.4 284.9 297.7
yoy % growth 5.8% 10.2% 5.2% 18.0% 20.0% 18.3% 15.7% 21.6% 8.1% 8.3% 8.6% 11.0% 4.5%
Big Fish Games 413.7 486.2 112.0 112.6 117.9 342.5
yoy % growth NA 17.5% (8.3%) (10.1%) (3.6%) (29.6%)
Other Investments 20.1 20.8 5.5 6.5 5.7 6.0 23.7 5.5 6.5 10.0 17.0 39.0 70.3
Corporate/Eliminations (18.0) (21.2) (3.9) (12.0) (4.3) (4.7) (24.9) (4.1) (5.0) (5.0) (5.0) (19.1) (19.1)
Total Net Revenues 1,212.2 1,308.6 279.5 451.9 314.8 178.9 1,225.1 189.3 372.8 208.9 194.4 965.4 1,020.3
yoy % growth 49.3% 7.9% (3.1%) 3.1% 3.8% (35.7%) (6.4%) (32.3%) (17.5%) (33.6%) 8.7% (21.2%) 5.7%
EBITDA
Racing 71.8 79.7 (9.7) 98.7 1.7 (6.2) 84.5 (9.4) 109.2 1.7 (6.1) 95.4 102.1
Margin 27.4% 29.7% (37.2%) 56.2% 4.1% (18.8%) 30.5% (35.9%) 57.0% 4.1% (18.8%) 32.7% 34.3%
Casinos 114.9 125.8 35.3 37.5 39.5 33.7 146.0 44.3 40.0 41.5 35.1 160.9 166.2
Margin (includes JV EBITDA) 34.5% 37.8% 40.3% 42.5% 45.1% 38.6% 41.7% 45.2% 43.3% 45.6% 40.0% 43.6% 44.4%
Wholly Owned Casino Margin 28.6% 29.3% 29.1% 29.8% 30.6% 27.8% 29.3% 33.9% 30.7% 31.3% 28.7% 31.2% 31.9%
TwinSpires 48.6 55.2 13.2 19.3 18.8 13.1 64.4 16.5 21.2 20.4 14.2 72.3 75.5
Margin 24.1% 24.9% 25.2% 23.9% 28.4% 22.8% 25.1% 25.9% 24.3% 28.4% 22.8% 25.4% 25.4%
Big Fish Games 68.4 79.2 20.3 18.3 17.0 55.6

Margin (as % of Bookings) 15.1% 16.3% 18.3% 16.3% 13.7% 16.0%
Other Investments 2.9 2.7 0.6 1.3 1.1 0.7 3.7 0.3 0.3 1.2 3.7 5.5 14.8
Corporate (4.2) (8.1) (2.4) (2.1) (2.1) (3.7) (10.3) (2.5) (2.5) (2.5) (2.5) (10.0) (10.3)
Adjusted EBITDA 302.5 334.5 57.3 173.0 76.0 37.6 343.9 49.2 168.2 62.3 44.4 324.1 348.3
Margin 25.0% 25.6% 20.5% 38.3% 24.1% 21.0% 28.1% 26.0% 45.1% 29.8% 22.9% 33.6% 34.1%
yoy % growth 49.4% 10.6% 22.7% 8.0% 6.9% 23.3% 2.8% 35.5% 8.1% 4.0% 18.1% 13.3% 7.5%
FAS 123 Expense (13.8) (18.9) (4.9) (6.7) (5.8) (5.3) (22.7) (6.1) (6.1) (6.1) (6.1) (24.4) (24.4)
Depreciation and Amortization (109.8) (108.6) (24.5) (24.8) (24.0) (14.0) (87.3) (13.8) (13.8) (13.8) (13.8) (55.2) (55.2)
Big Fish Deferred Revenue and Adjustments (21.7) (4.9)
Less JV EBITDA (19.8) (28.2) (9.8) (11.2) (12.8) (9.5) (43.2) (11.0) (11.7) (13.1) (9.9) (45.6) (46.8)
Other/Miscellaneous (13.8) 20.3 (0.6) (0.8) (0.4) (21.6) (23.5) 1.4 1.0 1.0 1.0 4.4 4.4
Operating Income 123.6 194.2 17.5 129.5 33.0 (12.8) 167.2 19.7 137.7 30.3 15.6 203.3 226.3
Net Interest Expense (28.6) (43.7) (11.8) (11.6) (12.6) (13.2) (49.2) (9.6) (10.3) (9.4) (9.2) (38.5) (30.8)
Equity in income of unconsolidated investments 11.2 17.4 6.1 7.7 8.9 2.8 25.5 6.5 7.9 9.2 2.9 26.5 27.3
Other 5.9 0.2 0.0 0.2 (1.0) (20.2) (21.0) 0.1 0.0 0.0 0.0 0.1 0.0
Income Before Taxes (continuing operations) 112.1 168.1 11.8 125.8 28.3 (43.4) 122.5 16.7 135.2 30.1 9.3 191.3 222.7
Provision for Taxes (46.9) (60.0) (4.5) (47.5) (11.6) 77.8 14.2 (2.6) (33.1) (7.4) (2.3) (45.4) (54.6)
Tax Rate 41.8% 35.7% 38.1% 37.7% 41.0% NMF (11.6%) 15.6% 24.5% 24.5% 24.5% 23.7% 24.5%
Net Income (Loss) from continuing ops 65.2 108.1 7.3 78.3 16.7 34.4 136.7 14.1 102.1 22.7 7.0 146.0 168.2
Income from discontinued ops (net of tax) 3.8 3.8 167.9
Net Income (Loss) 38.2 38.2 182.0
Adjustments to Net Income 1.7 1.7 0.0
Adjusted Net Income 15.8 102.1 22.7 7.0 147.7 168.2
Adj. EPS $3.68 $6.38 $0.44 $4.81 $1.08 $2.22 $8.54 $1.09 $7.53 $1.68 $0.52 $10.81 $12.40
yoy % growth 42.2% 73.6% 164.1% 17.1% 108.7% 39.1% 33.8% 150.5% 56.7% 55.6% (76.7%) 26.7% 14.7%
Fully Diluted Shares Outstanding 17.6 16.9 16.8 16.3 15.5 15.5 16.0 14.5 13.6 13.6 13.6 13.8 13.6
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Figure 7: CHDN FCF and Balance Sheet Model

($MM, except per share data) 2015 2016 1Q17 2Q17 3Q17 4Q17 2017 1Q18 2Q18E 3Q18E 4Q18E 2018E 2019E
EBITDA 302.5 334.5 57.3 173.0 76.0 37.6 343.9 49.2 168.2 62.3 44.4 324.1 348.3
Less Cash Taxes (46.9) (60.0) (4.5) (47.5) (11.6) (27.9) (91.5) (0.2) (27.0) (6.0) (1.9) (35.1) (46.8)
Less Cash Interest Expense (28.6) (39.8) (11.8) (11.6) (12.6) (13.2) (49.2) (4.6) (2.6) (13.7) (1.6) (22.5) (26.8)
Less Maintenance Capex (31.1) (30.9) (10.2) (7.7) (8.8) (6.6) (33.3) (7.5) (9.0) (9.0) (9.0) (34.5) (33.0)
Less Dividends paid (17.4) (19.1) (21.8) 0.0 0.0 0.0 (21.8) (23.7) 0.0 0.0 0.0 (23.7) (20.6)
Plus/Less Other 0.0 0.0 0.0 0.0
Equals Normalized Free Cash Flow 178.6 184.7 9.0 106.2 43.0 (10.1) 148.1 13.2 129.6 33.6 32.0 208.3 221.2
Less: Project/Growth Capex (12.5) (23.8) (27.3) (18.8) (16.3) (21.2) (83.6) (26.5) (46.0) (47.0) (10.5) (130.0) (30.0)
Less: Acquisitions 0.0 0.0 (23.1) (23.1) 0.0 0.0
Less: Payment of Big Fish Earnout (282.0) (34.2) (34.2) (62.6) (62.6) 0.0
Less: Share repurchase (7.8) (163.9) (171.7) (514.4) (514.4) 0.0
Plus: Asset Sales 6.0 26.5 0.0 970.7 970.7 0.0
Plus/Less: Other (45.1) (18.6) 20.2 (16.6) (62.7) 12.1 (47.0) 13.6 (24.0) (10.4) 0.0
Equals Excess FCF Used to Reduce Debt (11.1) (140.8) (40.1) (116.2) (36.0) (19.2) (211.5) 394.0 59.6 (13.4) 21.5 461.6 191.2
Balance Sheet Summary 2015 2016 1Q17 2Q17 3Q17 4Q17 2017 1Q18 2Q18E 3Q18E 4Q18E 2018E 2019E
Cash 74.5 48.7 54.9 41.8 57.8 51.7 51.7 202.7 102.7 102.7 102.7 102.7 62.4
Debt 781.8 927.5 973.8 1,076.9 1,128.9 1,142.0 1,142.0 899.0 739.4 752.9 731.4 731.4 500.0
Net Debt 707.3 878.8 918.9 1,035.1 1,071.1 1,090.3 1,090.3 696.3 636.7 650.2 628.7 628.7 437.6
Change in Net Debt 11.1 171.5 40.1 116.2 36.0 19.2 211.5 (394.0) (59.6) 13.4 (21.5) (461.6) (191.2)
Equity (adjusted for non-controlling interests) 617 685 689 601 626 918 918 394 496 519 526 526 673
Credit Ratios
Net Debt/EBITDA (TTM) 2.3x 2.6x 2.7x 2.9x 3.0x 3.2x 3.2x 2.1x 1.9x 2.0x 1.9x 1.9x 1.3x
EBITDA/Interest (TTM) 10.6x 7.7x 7.7x 7.9x 7.7x 7.0x 7.0x 6.4x 6.9x 7.5x 8.4x 8.4x 11.3x
Figure 8: CHDN Racing and TwinSpires Revenue Model

Racing Drivers 2015 2016 1Q17 2Q17 3Q17 4Q17 2017 1Q18 2Q18E 3Q18E 4Q18E 2018E 2019E
Race Days 230 222 55 64 57 48 224 54 64 57 48 223 223

Total Handle ($ mm) 1,255.9 1,258.4 203.7 597.3 239.9 233.8 1,274.7 209.8 618.2 239.9 233.8 1,301.7 1,321.2
Handle per race day ($ mm) $5.5 $5.7 $3.7 $9.3 $4.2 $4.9 $5.7 $3.9 $9.7 $4.2 $4.9 $5.8 $5.9
yoy % growth 18.4% 3.8% (14.1%) 5.9% 3.7% (6.8%) 0.4% 4.9% 3.5% 0.0% 0.0% 2.6% 1.5%
Revenue as % of Handle 20.9% 21.3% 12.8% 29.4% 17.5% 14.1% 21.7% 12.5% 31.0% 17.2% 13.8% 22.4% 22.5%
Net Revenue 262.2 268.1 26.1 175.7 41.9 32.9 276.6 26.2 191.6 41.3 32.3 291.5 297.3
11.1% -1.5%
TwinSpires Drivers 2015 2016 1Q17 2Q17 3Q17 4Q17 2017 1Q18 2Q18E 3Q18E 4Q18E 2018E 2019E
Industry Handle 1.2% 0.6% -1.0% 1.2% 3.8% 2.3% 1.6% 6.2%
Total Handle ($ mm) 965.1 1,096.9 252.9 402.9 338.6 288.2 1,282.6 304.1 435.1 355.5 302.6 1,397.4 1,467.2
yoy % growth 7.5% 13.7% 6.8% 19.6% 20.7% 18.8% 16.9% 20.2% 8.0% 5.0% 5.0% 8.9% 5.0%
Net pari-mutuel revenues 183.6 201.8 47.0 74.1 61.2 52.5 234.8 56.3 80.0 64.3 55.1 255.7 268.5
Net Revenue as % of Handle 19.0% 18.4% 18.6% 18.4% 18.1% 18.2% 18.3% 18.5% 18.4% 18.1% 18.2% 18.3% 18.3%
Other 17.7 20.1 5.3 6.7 4.9 5.0 21.9 7.3 7.3 7.3 7.3 29.2 29.2
Net Revenue 201.3 221.9 52.3 80.8 66.1 57.5 256.7 63.6 87.3 71.6 62.4 284.9 297.7
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Figure 9: CHDN Casino Revenue and EBITDA Model

$ in millions 2015 2016 1Q17 2Q17 3Q17 4Q17 2017 1Q18 2Q18E 3Q18E 4Q18E 2018E 2019E
Oxford (ME)
Net Casino Revenues 80.4 84.6 20.9 23.1 25.2 21.6 90.8 24.2 25.2 27.7 22.2 99.3 101.3
yoy growth 5.1% 5.2% 5.0% 9.5% 3.3% 12.5% 7.3% 15.8% 9.0% 10.0% 3.0% 9.4% 2.0%
Riverwalk (MS)
Net Revenues 49.8 46.1 11.5 12.0 12.2 12.5 48.2 14.4 12.6 12.2 12.5 51.7 51.7
yoy growth -0.7% -7.4% -9.4% -3.2% 15.1% 20.2% 4.6% 25.2% 5.0% 0.0% 0.0% 7.3% 0.0%
Harlow's (MS)
Net Revenues 49.0 48.4 13.5 12.5 12.3 11.7 50.0 13.3 12.5 12.3 11.7 49.8 49.8
yoy growth -2.4% -1.2% 3.8% 5.0% 5.1% -0.8% 3.3% -1.5% 0.0% 0.0% 0.0% -0.4% 0.0%
Calder (FL)
Net Revenues 77.3 79.1 21.4 21.8 19.4 22.8 85.4 24.3 22.7 19.6 21.7 88.2 88.7
yoy growth 0.4% 2.3% 5.4% 6.3% 2.1% 18.1% 8.0% 13.6% 4.0% 1.0% -5.0% 3.3% 0.5%
Fair Grounds (LA)

Net Revenues 39.0 36.9 10.2 8.8 8.7 8.8 36.5 10.6 8.8 8.7 8.8 36.9 36.9
yoy growth -4.3% -5.4% -3.8% 0.0% 2.4% -2.2% -1.1% 3.9% 0.0% 0.0% 0.0% 1.1% 0.0%
VSI (LA)
Net Revenues 36.9 36.9 9.7 9.8 9.3 9.5 38.3 11.0 10.3 10.2 10.5 42.0 44.5
yoy growth 9.7% -0.1% -1.0% 3.2% 8.1% 5.6% 3.8% 13.4% 5.0% 10.0% 10.0% 9.6% 6.0%
Other (Saratoga) 0.4 0.8 0.3 0.3 0.4 0.3 1.3 0.3 0.3 0.3 0.3 1.2 1.2
Wholly-owned Casino Net Revenues 332.9 332.8 87.5 88.3 87.5 87.2 350.5 98.1 92.3 91.0 87.7 369.1 374.1
yoy growth 1.4% 0.0% 1.2% 4.6% 5.4% 10.5% 5.3% 12.1% 4.6% 4.1% 0.5% 5.3% 1.3%
Operating Expenses:
Gaming Taxes:
Oxford (ME) 32.4 33.9 8.3 9.3 10.1 8.5 36.1 9.5 10.1 11.1 8.7 39.5 40.3
Table Tax Rate 18.0% 18.0% 18.0% 18.0% 18.0% 18.0% 18.0% 18.0% 18.0% 18.0% 18.0% 18.0% 18.0%
Slot Tax Rate 48.0% 48.0% 48.0% 48.0% 48.0% 48.0% 48.0% 48.0% 48.0% 48.0% 48.0% 48.0% 48.0%
Riverwalk (MS) 6.0 5.5 1.4 1.4 1.5 1.5 5.8 1.7 1.5 1.5 1.5 6.2 6.2
Gaming Tax Rate 12.0% 12.0% 12.0% 12.0% 12.0% 12.0% 12.0% 12.0% 12.0% 12.0% 12.0% 12.0% 12.0%
Harlow's (MS) 5.9 5.8 1.6 1.5 1.5 1.4 6.0 1.6 1.5 1.5 1.4 6.0 6.0
Gaming Tax Rate 12.0% 12.0% 12.0% 12.0% 12.0% 12.0% 12.0% 12.0% 12.0% 12.0% 12.0% 12.0% 12.0%
Calder (FL) 26.1 26.0 7.2 7.3 6.5 7.6 28.6 8.2 7.6 6.5 7.2 29.6 29.7
Gaming Tax Rate 35.0% 35.0% 35.0% 35.0% 35.0% 35.0% 35.0% 35.0% 35.0% 35.0% 35.0% 35.0% 35.0%
Fair Grounds (LA) 17.8 16.9 4.7 4.0 4.0 4.0 16.8 4.8 4.0 4.0 4.0 16.9 16.9
Gaming Tax Rate 40.5% 40.5% 40.5% 40.5% 40.5% 40.5% 40.5% 40.5% 40.5% 40.5% 40.5% 40.5% 40.5%
VSI (LA) 11.1 11.1 2.9 2.9 2.8 2.9 11.5 3.3 3.1 3.1 3.1 12.6 13.3
Tax Rate 30% 30.0% 30.0% 30.0% 30.0% 30.0% 30.0% 30.0% 30.0% 30.0% 30.0% 30.0% 30.0%
Sub-total Gaming Taxes 99.2 99.3 26.1 26.5 26.3 25.9 104.8 29.1 27.9 27.7 26.0 110.7 112.4
Other Opex 138.6 135.9 35.9 35.4 34.4 37.1 142.9 35.7 36.1 34.9 36.5 143.2 142.3
As a % of Total Net Revenues 41.6% 40.8% 41.0% 40.1% 39.3% 42.6% 40.8% 36.4% 39.1% 38.3% 41.6% 38.8% 38.0%
Total Opex 237.8 235.2 62.0 62.0 60.8 63.0 247.7 64.8 64.0 62.6 62.5 253.9 254.7
Wholly Owned Casino EBITDA 95.1 97.6 25.5 26.4 26.8 24.2 102.8 33.3 28.3 28.5 25.2 115.3 119.4
Margin % 28.6% 29.3% 29.1% 29.8% 30.6% 27.8% 29.3% 33.9% 30.7% 31.3% 28.7% 31.2% 31.9%
JV EBITDA - 50% MVG 19.1 22.4 6.4 6.5 5.8 5.6 24.3 6.8 6.7 5.9 5.7 25.1 25.7
JV EBITDA - 25% SCH 0.7 5.8 3.4 4.7 7.0 3.9 19.0 4.2 5.0 7.2 4.2 20.5 21.1
Total Casino Adjusted EBITDA 114.9 125.8 35.3 37.5 39.5 33.7 146.0 44.3 40.0 41.5 35.1 160.9 166.2
Margin 34.5% 37.8% 41.7% 43.6% 44.4%
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Churchill Downs: Summary of Financials

Income Statement - Annual FY16A FY17A FY18E FY19E Income Statement - Quarterly 1Q18A 2Q18E 3Q18E 4Q18E
Net Revenues 1,309 1,225 965 1,020 Net Revenues 189A 373 209 194
Adj. EBITDAR 335 344 324 348 Adj. EBITDAR 49A 168 62 44
Rent expense - - - - Rent expense - - - -
Adj. EBITDA 335 344 324 348 Adj. EBITDA 49A 168 62 44
D&A (109) (87) (55) (55) D&A (14)A (14) (14) (14)
Other (955) (859) (617) (648) Other (134)A (198) (141) (144)
Operating income 226 257 269 293 Operating income 35A 154 48 31
Net interest income / (expense) (44) (49) (39) (31) Net interest income / (expense) (10)A (10) (9) (9)
Other income / (expense) (14) (64) (39) (40) Other income / (expense) (9)A (9) (9) (12)
Pretax income 168 123 191 223 Pretax income 17A 135 30 9
Income taxes (60) 14 (45) (55) Income taxes (3)A (33) (7) (2)
Net income - GAAP 108 137 146 168 Net income - GAAP 14A 102 23 7
Diluted shares outstanding 17 16 14 14 Diluted shares outstanding 15A 14 14 14
EPS - recurring 6.39 8.54 10.70 12.40 EPS - recurring 1.09A 7.53 1.68 0.52
EPS - GAAP 6.39 8.54 10.58 12.40 EPS - GAAP 0.97A 7.53 1.68 0.52
Balance Sheet and Cash Flow Data FY16A FY17A FY18E FY19E Ratio Analysis FY16A FY17A FY18E FY19E
Cash and cash equivalents 49 52 103 62 Net Revenue growth 7.9% (6.4%) (21.2%) 5.7%
Total debt 928 1,142 731 500 EBITDA growth 17.2% 13.6% 4.8% 9.0%
Net Debt 879 1,090 629 438 EPS growth 72.4% 33.5% 25.4% 15.9%
Shareholders' equity 685 918 526 673
EBIT margin 17.3% 20.9% 27.9% 28.7%
Net income (including charges) 126 116 211 275 EBITDA margin 17.3% 20.9% 27.9% 28.7%
D&A 109 87 55 55 Tax rate 35.7% 11.6% 23.7% 24.5%
Other - - - - Net margin 8.3% 11.2% 15.3% 16.5%
Maintenance Capex (31) (33) (35) (33)
Free cash flow 232 213 261 320 Net debt / EBITDA 262.7% 317.0% 194.0% 125.6%
Interest coverage ratio 7.7 7.0 8.4 11.3
Return on Average Equity (ROAE) 16.6% 17.1% 20.5% 28.1%
FCF / Share 13.71 13.32 18.95 23.62
P/E 42.9 32.1 25.9 22.1
Enterprise value / EBITDA 16.5 15.9 13.6 11.9

Note: $ in millions (except per-share data).Fiscal year ends Dec
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Churchill Downs (CHDN, CHDN US) Price Chart
434 N $155 N $220
372 Date Rating Share Price Price Target

N $150 N $138 N $180
($) ($)
310 22-Sep-16 N 149.78 160.00
N $160 N $148
N $160 N $270
28-Oct-16 N 135.48 150.00
248
Price($) 23-Feb-17 N 154.40 148.00
186 01-Mar-17 N 152.30 138.00

20-Apr-17 N 169.30 155.00
124 27-Apr-17 N 166.80 160.00
28-Jul-17 N 189.85 180.00
62 02-Nov-17 N 209.35 220.00
01-Mar-18 N 256.20 270.00
0
Apr Jul Oct Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr
15 15 15 16 16 16 16 17 17 17 17 18 18
Source: Bloomberg and J.P. Morgan; price data adjusted for stock splits and dividends.
Initiated coverage Sep 22, 2016.
The chart(s) show J.P. Morgan's continuing coverage of the stocks; the current analysts may or may not have covered it over the entire
period.
J.P. Morgan ratings or designations: OW = Overweight, N= Neutral, UW = Underweight, NR = Not Rated
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average total return of the stocks in the analyst’s (or the analyst’s team’s) coverage universe.] Neutral [Over the next six to twelve
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Coverage Universe: Politzer, Daniel B: Churchill Downs (CHDN), Eldorado Resorts (ERI)
J.P. Morgan Equity Research Ratings Distribution, as of April 02, 2018

Overweight Neutral Underweight
(buy) (hold) (sell)
J.P. Morgan Global Equity Research Coverage 46% 41% 13%
IB clients* 52% 49% 39%
JPMS Equity Research Coverage 45% 43% 13%
IB clients* 72% 67% 57%
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For purposes only of FINRA/NYSE ratings distribution rules, our Overweight rating falls into a buy rating category; our Neutral rating falls into a hold
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CHDN share price ($)

Churchill Downs Inc. (CHDN;CHDN US)

See page 14 for analyst certification and important disclosures.

 Embedded Value in Arlington and Calder Track/Land. We assign $11 of value to

Daniel Politzer, CFA North America Equity Research

Figure 1: CHDN 1Q18 Results Summary

($MM, except per share data) CHDN Actual JPM Estimates

Racing 26.2 26.1 0.1 0.4% 26.0 0.2 0.9%

FAS 123 Expense (6.1) (5.3) (0.8) 15%

Net Interest Expense (9.6) (12.3) 2.7 -22%

Provision for Taxes (2.6) (3.2) 0.6 NM

Adjusted Net Income 15.8 9.8 6.0 NM

Adj. EPS $1.09 $0.68 $0.41 NM

Fully Diluted Shares Outstanding 14.5 14.4 0.1 1%

Daniel Politzer, CFA North America Equity Research

CHDN in Process of Acquiring Two Casino Properties for

In aggregate, the transaction represents a multiple of ~8.8x aggregate TTM EBITDA

Figure 2: We Estimate CHDN’s Casino Acquisitions Add $12 Per Share

Daniel Politzer, CFA North America Equity Research

Embedded Value in Arlington and Calder Track/Land

Margin % 30% 30% 30%

Total Property EBITDA $42 $48 $55

Total Value $378 $435 $491

Shares 13.6 13.6 13.6

Incremental value per share $15 $19 $23

Arlington Park Sale Scenario

Acres 336 336 336 336 336 336 336 336

Proceeds $44 $72 $101 $129 $158 $186 $201 $215

Incremental value per share $3 $5 $7 $9 $12 $14 $15 $16

Net Arlington Value

Land Sale Scenario $12

Total Arlington Value $13

Source: Company reports and J.P. Morgan estimates.

Daniel Politzer, CFA North America Equity Research

Figure 4: We Assign ~$2 of Equity Value to Calder

Proceeds $14 $28 $43 $57 $72 $86 $94 $101

Incremental value per share $1 $2 $3 $4 $5 $6 $7 $7

Calder decoupling scenario

Daniel Politzer, CFA North America Equity Research

Derby City Gaming

Taxes $8.3 $9.4 $10.4

Net Gaming Revenues $35.5 $39.9 $44.3

Total Revenues $37 $42 $47

EBITDA $13 $15 $16

Shares Outstanding 13.6 13.6 13.6

Daniel Politzer, CFA North America Equity Research

Investment Thesis, Valuation and Risks

CHDN Current Valuation

Year EPS P/E

Year FCF/Share FCF Yield

Source: J.P. Morgan estimates.

Daniel Politzer, CFA North America Equity Research

CHDN Price Target Methodology

Kentucky Derby $111 x 16.0x = $1,779

TwinSpires $75 x 10.0x = $755

Sub-total $344 x 11.5x = $3,948

Corporate ($10) x 11.5x = ($118)

Share Price $274.00

2018E Free Cash Flow per Share $15.36

2019E Free Cash Flow per Share $16.31

Source: J.P. Morgan estimates.

Risks to Rating and Price Target

Daniel Politzer, CFA North America Equity Research