Youbet: Still an Attractive Stock, Despite the Decline

Includes: CHDN, UBET
by: Jeffrey Walkenhorst, CFA

Small-cap stocks can move quickly, up or down. Just one week ago, shares of (UBET) touched $3.79 intra-day and now the stock is down 17% from that level. Meanwhile, the S&P 500 is actually up 2% over the last week. We note that the decline occurred on volume lower than the average three-month trading volume of 332 thousand shares per day.

Date Open High Low Close Volume Adj Close*
6-Aug-09 3.26 3.34 3.15 3.15 171,100 3.15
5-Aug-09 3.50 3.50 3.28 3.30 184,700 3.30
4-Aug-09 3.67 3.68 3.40 3.51 225,700 3.51
3-Aug-09 3.69 3.71 3.61 3.71 137,400 3.71
31-Jul-09 3.66 3.79 3.61 3.61 254,400 3.61

What happened? Hard to say, but appears that someone either decided to book a gain after the share price recovery in recent months and/or became frightened by economic data that shows consumers remain in hibernation. In addition, specific to horse racing, Equibase reported that US wagers for the month of July were down 13.4% Y/Y, with YTD wagers down 10.9% Y/Y.

However, the Daily Racing Form highlighted that the Y/Y comparison isn't apples to apples because Saratoga and Del Mar, two major racetracks, started their meets one week later this year. Even so, the reported Y/Y decline in July was at least a moderation from the 17% decline reported by Equibase for the month of June. Our point: the incremental news was actually a slight positive for the industry and for

Also, surprisingly, the Market seems to have missed Churchill Downs 2Q09 report last Wednesday after market close. Churchill's (NASDAQ:CHDN) headlines:

  • Company’s Second-Quarter Net Revenues, Net Earnings and EBITDA From Continuing Operations Increase Year-Over-Year Despite Tough Economy
  • Slot-Machine Gaming and Online Businesses Continue to Fuel Company’s Growth

And key point in first paragraph:

The primary drivers for the year-over-year increases in both net earnings and EBITDA from continuing operations were the continued growth of the Company’s online business – including the advance-deposit wagering (“ADW”) platform,, which posted gains in net revenues from continuing operations of 35 percent compared to the prior period – and the growth of the Company’s gaming business in Louisiana, which improved its quarter-over-quarter net revenues from continuing operations by 31 percent.

One the back of industry content agreements with ADW players like Youbet, Churchill realized meaningful Y/Y growth in online revenue and cash flow. Online revenue increased 35% Y/Y to $21 million while EBITDA increased more than 200% to $5.2 million (25% margin).

We expect Youbet to also benefit from the new content arrangements, albeit with lower margins relative to legacy content. In our view, this remains the one unknown headed into next week's earnings report. We're also curious to learn more about Youbet's strategy to enter the European market (see this 7/30/09 article from EGamingReview), although we suspect management is not yet in a position to share details. Plus, any European initiatives will likely take time to scale.

Bottom-line: Contrary to the decline in the share price, the Equibase numbers show slight moderation in the Y/Y pace of decline and results from Churchill Downs bode well for Other than that, nothing has changed since our 7/18/09 post: we already know/knew the consumer/gaming market is under duress, yet Youbet is one of only a handful of companies actually growing in the current environment. Not only that, the company has a solid balance sheet and should generate meaningful excess cash flow this year, next year, and the year after, assuming no strategic blunders. With the share price decline this week, the 2009E free cash flow yield is back to 10.7%, which we find very attractive relative to many alternatives.

Disclosure: Long UBET.