Churchill Downs, Sands Tipped as Lower Rate Winner By Goldman Sachs

Posted on: April 3, 2023, 03:35h. 

Last updated on: April 4, 2023, 10:32h.

Todd Shriber @etfgodfather Read More
Expertise: Financial, Gaming Business, Mergers and Acquisitions.

The Federal Reserve could be nearing the end of its interest rate-hiking campaign, meaning it could be time for investors to consider stocks with growth profiles, including Churchill Downs (NASDAQ: CHDN) and Las Vegas Sands (NYSE: LVS).

Churchill Downs.
Scenes from the Kentucky Derby. Goldman Sachs is constructive on Churchill Downs shares. (Image: Churchill Downs)

That’s according to a new report from Goldman Sachs equity strategist David Kostin. Kostin and team screened the Russell 3000 Index for companies with market values of at least $1 billion and annual sales of at least $100 million — excluding biotechnology, energy, financial services, and real estate corporations — for high-margin growth traits.

The aim of the endeavor was to unearth stocks that could thrive if rates fall and the economy flourishes, as well as those that could be durable in a potential recession. There are also other reasons to consider high-margin growth names, notes Kostin.

While historical precedent suggests upside risk to our forecast for a flat equity market, we believe S&P 500 valuations and earnings each face specific headwinds in 2023 that will prevent near-term returns from being as strong as usual at the end of previous tightening cycles,” wrote the Goldman Sachs strategist.

Churchill Downs and Las Vegas Sands were two of the three consumer cyclical stocks on the bank’s list.

Sands Sensible Inclusion on Goldman List

Already up 22% year to date, Sands makes for a practical inclusion on the Goldman Sachs list because shares of the Venetian Macau operator aren’t highly correlated to interest rates.

Additionally, by virtue of the fact the operator’s entire portfolio of six properties is located outside the US, the stock could be somewhat resilient to a domestic recession. In even better news for investors, it’s likely that Sands turned a profit in Macau in the first quarter, or at the very least, significantly reduced earnings before interest, taxes, depreciation, and amortization (EBITDA) losses there.

While it remains to be seen exactly when the Fed will move to lower interest rates, such a move would benefit LVS. That’s presuming it needs to head to debt markets to raise capital for enhancements at its Macau properties and Marina Bay Sands, or for domestic endeavors, including its New York casino bid. Plus, stocks in general often rise following the end of a monetary tightening cycle.

“US equities have generally rallied in the months following the end of past Fed tightening cycles,” according to Kostin.

Churchill Call

Churchill Downs’ appearance on the Goldman Sachs high-margin growth list arrives in advance of the Kentucky Derby, the company’s marquee event at its eponymous track in its home state.

With a 12-month sales growth consensus estimate of 15% and a margin growth forecast of 19% for the same period, Churchill Downs fits the bill as a high-margin/high-growth stock. The shares are up 21.06% year-to-date, and some on Wall Street are bullish on the name.

Enhancements to its namesake track and a partnership with FanDuel are among the catalysts for Churchill stock, noted Macquarie analyst Chad Beynon in a recent note.

“We expect the upgraded facilities and increasingly global viewers to continue to enjoy the event. In 2024E, CHDN will also benefit from the Paddock project (~$185-200m project, <8-year payback),” wrote the analyst. “Given the iconic nature of the asset and the pricing power, we believe CHDN should garner a premium valuation multiple even to comparable global luxury and unique brands.”