Don't let it get away!
Keep track of the stocks that matter to you.
Help yourself with the Fool's FREE and easy new watchlist service today.
Investors who had hoped their money would be off to the races are discovering that their holdings in racetrack companies are just way off.
Most publicly held racetrack companies finished out of the money in a 12-month race against the S&P 500 index -- which fell 39.6% for the 12 months ended March 19. Only Churchill Downs (Nasdaq: CHDN ) beat the index, and its shares were off 28.4%.
Churchill Downs wants to stay ahead of the pack by increasing its existing slot-machine and video-poker offerings and expanding off-track betting opportunities. It's planning to build a stand-alone slot machine facility at its Miami Gardens track in Florida.
It also wants to put slot machines at the home of the Kentucky Derby, citing the politics of taxation as a reason for hope. "We remain optimistic that the needs for new state revenues will eventually result in us getting the right to conduct slot machine gaming in both Kentucky and in Illinois," CEO Robert Evans recently told analysts.
More than horses
Evans' desire to diversify isn't surprising. Churchill Downs is simply responding to changing times. The Thoroughbred Times notes that U.S. pari-mutuel betting peaked in 2003. Last year, the thoroughbred racing handle -- the total amount bet -- was down 9% at all of Evans' tracks versus an 8% increase in 2007.
Although track revenue will be hard to forecast beyond 2009, Evans said that "one thing we know for sure is that tracks that can supplement purses with revenue from expanded gaming will be better positioned to compete."
Last year, total revenue from continuing operations rose 5% and racing revenue fell 9% for Churchill Downs, but slot-machine and video-poker revenue jumped 73%.
Some peers, including Penn National Gaming (Nasdaq: PENN ) , have been more aggressive in adding slot machines, video poker, and/or full-service casinos. (Penn National, which has expanded heavily into casinos, and Churchill Downs are the only racetrack companies that beat the S&P 500 index over the past five years.)
Rein in growth plans
However, Churchill Downs can't confuse diversifying its revenues with unfettered growth. The best -- or worst -- example is Magna Entertainment, which, based on revenue, is the largest operator of horse racetracks in North America, including Gulfstream Park in Florida and Santa Anita Park in California.
Magna filed for Chapter 11 in early March and was delisted from the Nasdaq on March 16. It acquired or took majority stakes in 13 tracks between December 1998 and October 2002, according to the Thoroughbred Times.
Another racetrack company that grew too much, too fast is MTR Gaming (Nasdaq: MNTG ) . Last year, it sold two casinos, including one that it had owned for only four years. It also closed an unprofitable Michigan harness racetrack that it had owned for three years.
MTR Gaming now preaches about "growing and optimizing [our] core assets," which include racetrack and gambling operations in West Virginia and Pennsylvania.
These experiences should be a warning to investors not to jump the gun with a company that might overbuild, overpay, or overbuy.
Churchill Downs has a sufficiently healthy balance sheet -- $57.4 million in long-term debt vs. $393.9 million in shareholders' equity at the end of last year -- to manage some expansion.
However, expanding operations during a recession still could be a long shot. If you're counting on a rapid revival of consumers' spending, an easing of credit, and the kindness of state legislatures, you're better off betting on the races than on the stock.