Is CHDN a Buy After Q2 Earnings? Derby Week Expansion, HRM Momentum, and Strategic Growth Catalysts

Churchill Downs Incorporated (CHDN) has long been a cornerstone of the gaming and entertainment sector, leveraging its high-barrier assets—such as the Kentucky Derby and historical racing machines (HRMs)—to generate consistent revenue and shareholder value. The company's Q2 2025 earnings report, released on July 23, 2025, underscores its ability to capitalize on these strengths while executing strategic expansion. With record-breaking revenue of $934.4 million, a 5% year-over-year (YoY) increase, and a 4% rise in net income to $216.9 million, CHDN's performance raises a critical question: Is this the right moment to invest in a company that combines event-driven momentum with disciplined capital management?

The Derby Effect: A Catalyst for Short- and Long-Term Growth

The 151st Kentucky Derby in May 2025 was a masterclass in event monetization. CHDN reported a record all-sources handle of $260.5 million for the race, driven by increased wagering via TwinSpires and international betting platforms. The Derby Week generated $380 million in total handle, a 12% increase YoY, and the event's average viewership of 17.7 million (up 6%) and peak of 21.8 million (up 8%) reinforced its cultural and financial significance.

This annual event is not just a revenue spike; it's a strategic lever. The Derby's global reach amplifies brand equity, attracting sponsors and enhancing the value of Churchill Downs' real estate and media assets. For example, the company's $200 million investment in The Rose (a luxury venue in Northern Virginia) and the May 2025 Richmond expansion are paying off, with Virginia HRM revenue up 18% YoY. These investments position CHDN to capture a larger share of the growing regional gaming market, where regulatory tailwinds and consumer demand for immersive experiences are converging.

HRM Momentum: A High-Barrier, Scalable Business Model

Historical Racing Machines (HRMs) remain CHDN's most defensible asset. The Live and Historical Racing segment contributed $540.9 million in revenue during Q2 2025, a $50.7 million YoY increase, driven by 18 new HRM locations in Virginia and Kentucky. These machines, which simulate horse racing with real-time outcomes, operate in a regulatory gray zone that gives CHDN a first-mover advantage. Competitors face significant hurdles in replicating the model, as HRMs require state-specific licenses and substantial capital for deployment.

The segment's Adjusted EBITDA of $296.5 million (up 17.3 million YoY) reflects the scalability of this model. For context, Virginia's HRM venues now generate 22% of CHDN's total revenue, a 400-basis-point increase since 2023. This growth is not just geographic; it's also technological. CHDN's integration of AI-driven analytics into HRM operations has improved customer retention and average daily handle, creating a flywheel effect.

Strategic Acquisitions and Tax Tailwinds: Fueling the Next Phase

CHDN's recent $180 million acquisition of 90% of Casino Salem in New Hampshire is a textbook example of its capital-efficient growth strategy. The acquisition, finalized on July 14, 2025, grants CHDN the right to develop a charitable gaming, entertainment, and dining destination at The Mall at Rockingham Park. This move diversifies the company's regional exposure, targeting the high-income Boston metro area, and adds a new revenue stream through retail and dining. Crucially, the transaction is structured to leverage CHDN's expertise in event-driven marketing, potentially replicating the Derby's success in a non-horse racing context.

The company's financial flexibility is further bolstered by the passage of H.R. 1, the federal tax and spending bill enacted on July 4, 2025. The bill reinstates 100% bonus depreciation and introduces a 30% EBITDA-based interest expense deduction, which CHDN estimates will reduce cash tax expenses by $91.2 million annually. These provisions not only enhance free cash flow but also validate CHDN's capital-intensive strategy, as the tax benefits offset the costs of expansion.

Capital Management: A Shareholder-Focused Playbook

CHDN's Q2 results also highlight its disciplined approach to capital returns. The company repurchased 2.6 million shares for $250.4 million under its existing stock buyback program and announced a new $500 million repurchase initiative on July 22, 2025. With a net leverage ratio of 4.2x and $185.6 million in cash on hand, CHDN is well-positioned to continue returning capital to shareholders without compromising growth. This strategy aligns with its long-term value proposition: balancing reinvestment in high-ROIC assets (like HRMs and Casino Salem) with direct returns to investors.

High-Barrier Advantages in a Fragmented Sector

The gaming and entertainment sector is notoriously fragmented, with low-margin players competing in a regulatory minefield. CHDN's dominance in high-barrier segments—Derby events, HRMs, and state-regulated gaming—creates a moat that most peers cannot replicate. For example, the company's 53-year lease on Churchill Downs Racetrack, combined with its exclusive rights to the Derby brand, ensures a recurring revenue stream with minimal capex. Meanwhile, its HRM network benefits from a 15-year state contract in Virginia, providing visibility into future cash flows.

Investment Thesis: A Buy in a High-Barrier Sector

CHDN's Q2 results confirm its ability to execute on multiple fronts: event-driven revenue, scalable HRM operations, strategic acquisitions, and tax-efficient capital management. The stock trades at a 12x forward P/E and 14x EV/EBITDA, which appears undemanding given its growth trajectory and industry-leading margins. While the Gaming segment saw a $8.1 million revenue decline due to Louisiana HRM closures, this is a temporary setback in a business with a strong core.

For investors seeking exposure to a high-barrier, cash-generative asset with a clear path to margin expansion, CHDN presents a compelling case. The company's ability to leverage its brand, technology, and regulatory expertise in new markets (like New Hampshire) suggests it is not merely defending its legacy but actively building a next-generation gaming and entertainment platform.

Conclusion
Churchill Downs Incorporated's Q2 2025 earnings demonstrate a company that is both a steward of its heritage and an innovator in its sector. With the Derby's global reach, HRM momentum, and strategic acquisitions, CHDN is well-positioned to compound value in the coming years. For investors with a medium-term horizon, the stock offers a rare combination of defensible cash flows, disciplined capital allocation, and growth catalysts. At current valuations, CHDN is not just a “buy”—it's a strategic bet on the future of high-margin entertainment.