Churchill Downs Inc (CHDN) stock intrinsic value fair value estimate & owner earnings analysis

Churchill Downs Incorporated owns the Kentucky Derby and Churchill Downs Racetrack, runs historical racing machine (HRM) entertainment venues in Kentucky, Virginia and New Hampshire, operates regional casinos in a number of states, and runs TwinSpires online horse wagering and the Exacta wagering technology business. In 2025 revenue was a record $2,925.9M (up 7.0%) and operating cash flow was $769.8M. How we measured earnings. We start with cash from operations, remove swings in working capital, subtract stock compensation ($30.2M in 2025) and subtract the capital spending needed to stay competitive. The company has spent heavily on new venues and Derby facilities (total capital spending of $676.5M in 2023, $547.0M in 2024 and $274.9M in 2025) and has announced more, so we treated nearly all of it as a cost of staying in business and gave a growth allowance only for a small formula-based portion, rather than accepting the company's own roughly $70M 'maintenance' label. On that basis earnings after interest were $6.98 per share in 2025, $2.45 in 2024 and negative $0.08 in 2023. The company's intangible assets are mostly indefinite-lived gaming rights and trademarks, so there is no large wasting amortization to carry. Our valuation follows the rule that lenders are paid first: we added cash interest back ($294.5M in 2025) to get the cash the business produces before its lenders, valued that stream, and then subtracted debt. That stream was $11.08 per share in 2025, $6.57 in 2024 and $3.65 in 2023. Starting level. We used the middle of 2024 and 2025, $8.83 per share. 2022 is excluded because it was the year of roughly $2.9 billion of acquisitions with only partial contribution, and 2023 is excluded as the peak building year. 2025 alone is not used because it was helped by $86.8M of deferred income taxes, against $44.5M in 2024 and $47.4M in 2023. First-half 2026 supports the level without lifting it: revenue was $1,643M versus $1,577M (up 4.2%), and operating cash flow was $512M versus $487M, with capital spending of $117M versus $165M. The actual growth in this stream in 2025 was 69%, but that jump mostly reflects lower capital spending; the base case assumes only 3% in year one. Base case: business worth about $175.34 per share (roughly $12.3 billion), debt of $68.50 per share ($4,795M of borrowings at June 30, 2026), leaving $106.84. The stream grows 3% a year for five years, 2% for two, 1% for two and is flat in year ten (about $10.86 per share), then stays flat. Growth credited: the ramp of venues that are already open (Owensboro, February 2025; The Rose in Dumfries, first full year in 2025; Roseshire, September 2025; Marshall Yards, February 2026), and a record of revenue growth every year from 2021 to 2025 funded from the company's own cash flow, at a pace below the 4.2% seen in the first half of 2026. Left out: extra earnings from the $280-$300M Derby building planned for completion by the 2028 Derby and the $180-$200M Rockingham casino planned for mid-2027, because their earnings are not yet demonstrated (their cost is already inside the starting level); new states; margin gains; and any property sales. After year ten we hold earnings flat rather than growing, because the Derby has run since 1875 and the state gaming rights are carried as indefinite-lived assets, but nothing named supports further growth. Bull case: business worth about $235.59 per share, debt of $68.50, leaving $167.09. The stream starts at $10.50 (2025 after removing the unusually large tax deferral) and grows 5% a year for five years, 3% for three years and 2% for one, then is flat. This is what happens if the recently opened venues and the Derby build-out keep producing what 2025 showed: revenue rose 7.0% in 2025 and 4.9% in the second quarter of 2026. Bear case: business worth about $102.37 per share, debt of $71.86, leaving $30.51. The stream starts at $6.57 and declines 1.5% a year for five years (to about $6.09 in year ten) and then stays flat. The drivers are named: the end of HRM operations in Louisiana in May 2025 removed $18.9M of revenue in 2025, which shows that a single state's rules can take earnings away; management has said a new casino in Petersburg, Virginia is pressuring margins at its Virginia HRM venues; and the heavy building programme is counted as a cost with no added earnings. Debt is also higher in this case: about $1.6 billion falls due in 2027 and 2028 ($600M of 5.50% notes on April 1, 2027, $700M of 4.75% notes on January 15, 2028 and $285.8M of term loan B-1), and we assume it is refinanced at about 8% instead of about 6%, adding roughly $32M a year, worth about $235M ($3.36 per share). The bank facilities also carry an earlier maturity trigger if the notes are not refinanced at least 91 days before they fall due. In this case the business still produces about $453M in year one against roughly $295M of cash interest, so it can carry its debt. Debt. Total borrowings were $4,795M at June 30, 2026, down from $5,155M at year-end 2025. Cash of $196M is treated as the working cash the casinos and racetrack need, so nothing is netted against debt. Interest paid in 2025 was $294.5M on about $5.0 billion of average debt, about 5.8%, close to the 6% we use, so we made no adjustment to the debt figure in the base and bull cases. At December 2025 the bank covenants were met with room: secured leverage of 1.4 times against a 4.0 times limit and interest coverage of 3.9 times against a 2.5 times minimum. Management reported net bank leverage of 3.7 times in mid-2026 and said it is exploring sales of nine gaming properties to reduce debt, reinvest and repurchase stock. No sale has been signed, so none is assumed; a sale at fair value would mostly swap earnings for lower debt. What could prove this wrong. The racing and HRM segment is the company's largest profit segment, so a change in Kentucky or Virginia HRM rules, taxes or competition would matter most. A higher tax burden after capital spending falls, since deferred taxes have been a large support to cash flow, would lower the level. On the other side, if the recently built venues earn more than we have credited, the bull case is closer than the base. Change since our previous estimate. We previously estimated $37 / $125 / $227 (bear / base / bull). The new figures are $30.51 / $106.84 / $167.09. The earlier estimate counted only the company-labelled maintenance spending (about $70M) as a cost, giving roughly $9.56 per share of earnings; we now treat most building spending as a cost, use a two-year middle value as the starting level, and credit growth of 3% rather than 7% in the base case. Working the other way, we now discount at a flat 6% and net debt is lower ($4.8 billion versus $5.1 billion). We could not review the text of the June 2026 quarterly report, so the debt and cash figures come from its filed financial data, and the comments on property sales come from management's earnings call rather than a signed agreement. Margin-of-safety price. Given leverage of 3.7 times, dependence on state gaming rules, and a bear case of about $30.51, the margin-of-safety price is near half of the base value, about $53.