Is Churchill Downs the Perfect Stock?

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Every investor would love to stumble upon the perfect stock. But will you ever really find a stock that provides everything you could possibly want?

One thing's for sure: You'll never discover truly great investments unless you actively look for them. Let's discuss the ideal qualities of a perfect stock, then decide if Churchill Downs (NAS: CHDN) fits the bill.

The quest for perfection
Stocks that look great based on one factor may prove horrible elsewhere, making due diligence a crucial part of your investing research. The best stocks excel in many different areas, including these important factors:

  • Growth. Expanding businesses show healthy revenue growth. While past growth is no guarantee that revenue will keep rising, it's certainly a better sign than a stagnant top line.
  • Margins. Higher sales mean nothing if a company can't produce profits from them. Strong margins ensure that company can turn revenue into profit.
  • Balance sheet. At debt-laden companies, banks and bondholders compete with shareholders for management's attention. Companies with strong balance sheets don't have to worry about the distraction of debt.
  • Money-making opportunities. Return on equity helps measure how well a company is finding opportunities to turn its resources into profitable business endeavors.
  • Valuation. You can't afford to pay too much for even the best companies. By using normalized figures, you can see how a stock's simple earnings multiple fits into a longer-term context.
  • Dividends. For tangible proof of profits, a check to shareholders every three months can't be beat. Companies with solid dividends and strong commitments to increasing payouts treat shareholders well.

With those factors in mind, let's take a closer look at Churchill Downs.

Factor

What We Want to See

Actual

Pass or Fail?

Growth5-Year Annual Revenue Growth > 15%15.2%Pass
 1-Year Revenue Growth > 12%21.4%Pass
MarginsGross Margin > 35%47.1%Pass
 Net Margin > 15%8.0%Fail
Balance SheetDebt to Equity < 50%28.4%Pass
 Current Ratio > 1.30.92Fail
OpportunitiesReturn on Equity > 15%9.5%Fail
ValuationNormalized P/E < 2017.54Pass
DividendsCurrent Yield > 2%1.1%Fail
 5-Year Dividend Growth > 10%3.7%Fail
    
 Total Score 5 out of 10

Source: S&P Capital IQ. Total score = number of passes.

With five points, Churchill Downs finishes back in the pack. But the racetrack owner's stock is behaving much more like a winning thoroughbred, with a big jump coming earlier this week.

Churchill Downs owns a network of horse-racing properties throughout the Mississippi River Basin and in Florida. In addition to its namesake racetrack in Louisville that hosts the Kentucky Derby every year, Churchill Downs also has tracks in suburban Chicago and Miami, and it operates casinos and slot-machine facilities closer to the Gulf Coast.

But the mid-America region has been a tough one for gaming and leisure companies in recent years. Even with solid sales growth in recent years, Churchill Downs lags far behind Las Vegas Sands (NYS: LVS) and Wynn Resorts (NAS: WYNN) , both of which have relied on overseas growth in gaming hotbeds like Macau to boost their overall results. Meanwhile, Pinnacle Entertainment (NYS: PNK) , which operates in the same areas as Churchill Downs, has struggled to keep its net margins above zero. Penn National (NAS: PENN) has had a better time of it, but it can thank a smart Las Vegas investment for much of its earnings boost.

In its most recent quarter, Churchill Downs blew out of the gate with better-than-expected results. The company saw a 9% revenue jump and posted $0.25 per share in earnings. Churchill Downs attributed the recent success, which includes a dividend increase in 2011, to its strategy as well as an improving economy.

For Churchill Downs to keep improving, a revival in interest in horseracing would go a long way toward boosting profits. A Triple Crown contender this year could be the catalyst the stock needs to get even closer to perfection.

Keep searching
No stock is a sure thing, but some stocks are a lot closer to perfect than others. By looking for the perfect stock, you'll go a long way toward improving your investing prowess and learning how to separate out the best investments from the rest.

Churchill Downs isn't perfect, but we've got some ideas you may like better. Let me invite you to learn about three smart long-term stock plays in the Fool's latest special report. It's yours for the taking and is absolutely free, but don't miss out -- click here and read it today.

Click hereto add Churchill Downs to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.

At the time this article was published Fool contributor Dan Caplinger doesn't own shares of the companies mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool has a disclosure policy.

Copyright © 1995 - 2012 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

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