Churchill Downs stock price falls 10 percent in a week

Shares in Churchill Downs Inc., which will host the Kentucky Derby on Saturday at its flagship Louisville track, have dropped more than 10 percent since the company announced its first-quarter earnings on April 28, the first double-digit decline in the company’s stock since the recessionary times of 2008.

The decline, which has wiped out $250 million in shareholder value in a week, likely reflects new doubts over the potential of Big Fish Games, a mobile-game operator that Churchill purchased late in 2014 in a deal worth $885 million. Though Churchill is on track to post a half-billion dollars in revenue from Big Fish’s various mobile offerings this year, the unit’s first-quarter results disappointed some analysts who expressed concern over a drop in a metric Churchill uses to describe Big Fish’s results. (The metric is not a generally accepted accounting principle.)

According to the company’s audited financial statements, revenue from Big Fish was $122.1 million in the first quarter this year, up $30.2 million from the first quarter of 2015. However, expenses jumped to $109.4 million, and that figure did not include research and development costs of $10.8 million, which Churchill keeps on a separate line item even though the costs are wholly related to Big Fish. Operating revenue from Big Fish, then, was only $1.9 million higher than operating expenses.

In a market where the success or failure of titles is highly unpredictable and the road to riches is paved with games that flopped, Big Fish offers dozens of simple mobile games, including one that is described as a “social casino.” Although casual gaming is a multibillion-dollar market in and of itself, Churchill purchased the company in large part to gain a foothold in the mobile-gaming market in the event that federal or state restrictions on Internet gambling are loosened down the road. As a result, the big payoff for the company could lie far down the road, a prospect that is baked into the share price.

In a conference call last week to discuss its first-quarter results, Churchill’s chief executive, Bill Carstanjen, said that Churchill spent an additional $14 million company-wide on marketing in the first three months of 2016 compared with the first three months of 2015. While the company did not break out the marketing spend for its racing, account-wagering, casino, or Big Fish units, it’s likely that most of the spending was focused on Big Fish’s titles, considering comments Carstanjen made later in the call about Churchill’s efforts to draw more people to Big Fish’s games.

“We want to spend intelligently on [user acquisition] now for bigger returns later on,” Carstanjen said.

Some of the recent drop in the stock price may also reflect profit taking. The acquisition of Big Fish touched off a long period of steady growth in Churchill’s stock price. When Churchill announced that it intended to purchase Big Fish on Nov. 12, 2014, its stock was trading at $104. While the share price languished for the next three months, the stock began rising in March, climbing steadily to its 52-week high of $151 near the one-year anniversary of the Big Fish announcement, a 45.2 percent gain over the one-year period. The stock was trading at $127.38 a share Thursday morning.

The performance of Churchill’s stock has an outsized effect on compensation for its executives, with pay being increasingly linked to stock price over the past decade. Carstanjen, for example, had $6.5 million in pay in 2015 from stock awards and “non-equity incentives,” according to a proxy statement filed last week, more than three-quarters of his total compensation package of $8.6 million. In the same year, Robert Evans, who stepped down as chief executive in August 2014 – months before the Big Fish acquisition – and then retired as the company’s “executive chairman” last September, had $7.6 million in total compensation, nearly all of it from stock awards.