The Kentucky Derby is in the rearview mirror, and that is precisely what makes Churchill Downs' third-quarter report so revealing. Without the May spectacle inflating the numbers, the September quarter shows how the rest of the company is holding up, and this time the rest of the company is in play. Last quarter management announced a strategic review to sell nine wholly owned regional casinos and recast the business around three cornerstones: the Derby, historical racing machines and TwinSpires. The stock has slipped since then, so this report arrives as an early test of whether that pivot is gaining traction or simply adding uncertainty.
Wall Street expects earnings of $1.28 a share on revenue of about $696.8 million. That would be 17.4% EPS growth against just 2% revenue growth versus the year-ago $1.09 and $683 million. The gap matters. A quarter in which profits outrun sales this sharply depends on cost discipline, a falling share count or lower interest expense, not a surge in demand. Management did not issue formal guidance to measure against, beyond broadly reaffirming its $15 million to $18 million incremental Derby EBITDA target, which has already largely shown up in the second quarter. So the Street's number is effectively a bet that cash generation and capital allocation keep doing the heavy lifting.
Capital allocation may be the most concrete thing to check. Management said it planned to repurchase shares in the second half with $430 million left on its authorization, supported by record first-half free cash flow of $474 million and net leverage that improved to 3.7 times from 4.1 times late last year. Evidence of meaningful buybacks, continued deleveraging and progress refinancing near-term maturities would back up the confident tone. Any word on the casino sales, which management now expects to happen individually or in small groups rather than as one package, would be just as important. Signed deals at reasonable prices would support management's argument that the share price undervalues these assets. Silence or talk of delays would feed the execution worries the pivot introduced.
Operationally, Virginia is the weak spot. Petersburg Casino's opening early this year cut Virginia EBITDA growth to 1% in the second quarter from 6% in the first, with Richmond, New Kent and Emporia feeling the pressure. If growth holds near flat, the competitive hit is being absorbed. If it turns negative, investors will reasonably question how durable the historical racing machine franchise is outside Kentucky. In Kentucky, where historical racing machine EBITDA rose 10% and the roulette-style rollout was still early, continued double-digit growth would show the cornerstone thesis holding outside Derby season. Presque Isle is worth a look for early benefit from Pennsylvania's ruling against skill games, while flat same-store casino margins and soft unrated play remain the regional headwind.
The market's mood has soured. The shares are down 4.1% since the last report while the S&P 500 gained 4.1%. At about $82 the stock sits below its 200-day moving average near $89 and in the lower half of its post-earnings range of $73 to $95, well below the prior quarter's $81 to $103 band. Sentiment readings have turned more bearish, moving from 18.9% bearish to 44.9% bearish. Record results paired with a sagging stock suggest investors doubt the transition more than the Derby.
That sets a somewhat lower bar, but a specific one. Hitting the EPS estimate on thin revenue growth will not by itself restore confidence. The narrative stays intact if Churchill Downs shows that buybacks, deleveraging and divestiture progress are turning its strong cash flow into per-share value, while Virginia stabilizes instead of eroding further.