BILLIONAIRES IN HORSE RACING 2018, PART I

Owning racehorses at the top level of the sport is an expensive proposition, with lots of risk.  The enterprise attracts wealthy people, including a small slice of the world’s richest.

Today, Horse Racing Business identifies some of the racehorse owners amongst the current 585 billionaires from the United States, as gleaned from Forbes’ annual enumeration and publication (dated March 31, 2018).  Tomorrow, the focus turns to horse-racing billionaires from outside the United States.

John Malone, $8.1 billion, principal fortune derived from cable television.  Ph.D. in operations research.  Colorado-based and owns Bridlewood Farm in Florida and Ballylinch Stud in Ireland.  Largest land-owner in the United States.

Tom Benson (deceased as of March 15, 2018), $3 billion, professional sports teams in New Orleans, GMB Racing.

Vincent Viola, $2.9 billion, electronic trading.  Self-made son of an Italian immigrant truck driver.  U. S. Military Academy graduate.  Originally slated to be in the Trump Administration as Secretary of the Army, but ultimately chose to withdraw for business reasons.  Part owner of 2017 Kentucky Derby winner Always Dreaming.

B. Wayne Hughes, $2.6 billion, self-storage.  Wealthiest Kentuckian.  (His son, B. Wayne Hughes Jr., is also a billionaire with an estimated net worth of $1.2 billion.)  Owns Spendthrift Farm in Kentucky.

Lee Bass (husband of notable owner Ramona S. Bass), $2.5 billion, oil and investments.  Ms. Bass’ late father, Arthur Seeligson, was a prominent racehorse owner.

Brad Kelley, $2.3 billion, tobacco.  Kentucky native living in Tennessee.  College drop out.  Fourth largest land owner in the United States, including famed Calumet Farm in Kentucky.

Kevin Plank, $1.5 billion, sports clothing.  Onetime University of Maryland football player and founder of Under Armour.  Owns former Alred G. Vanderbilt Sagamore Farm in Maryland.

Kenny Troutt, $1.4 billion, telecom, Texas-based and owns WinStar Farm in Kentucky.

Sidney Kimmel, $1.3 billion, retail.  His son, John Kimmel, a veterinarian by education, is a trainer in New York.

Copyright © 2018 Horse Racing Business

PENN NATIONAL GAMING, INC., 2017 OPERATING RESULTS

Penn National Gaming, Inc. (PENN) is an extremely leveraged company with a shareholders’ deficit, or a negative net worth, meaning that at the end of 2017 its liabilities exceeded its assets by $73 million (down from close to $550 million in 2016).  Its current and long-term liabilities accounted for 91.2% of its total assets, yielding an onerous debt-to-equity ratio of about 9 to 1.  In addition, its planned-for 2018 acquisition of Pinnacle Entertainment is drawing unusually close scrutiny, over antitrust concerns, by the Federal Trade Commission.  On a positive note, PENN could benefit greatly if the U. S. Supreme Court–in an upcoming decision–enables more states to offer sports betting.

__________________________

On March 1, 2018, PENN released its annual 10-K filing with the Securities & Exchange Commission.  PENN describes itself as “a leading, geographically diversified, multi‑jurisdictional owner and manager of gaming and racing facilities and video gaming terminal operations with a focus on slot machine entertainment.”  As of December 31, 2017, it “operated twenty‑nine facilities in the following seventeen jurisdictions: Florida, Illinois, Indiana, Kansas, Maine, Massachusetts, Mississippi, Missouri, Nevada, New Jersey, New Mexico, Ohio, Pennsylvania, Texas, West Virginia, California, and Ontario.”

According to PENN’s 10K filing, nearly 86% of its net revenue is derived from gaming and the remainder comes from “management service fees from Casino Rama, our hotel, dining, retail, admissions, program sales, concessions and certain other ancillary activities, and our racing operations.  Our racing revenue includes our share of pari‑mutuel wagering on live races after payment of amounts returned as winning wagers, our share of wagering from import and export simulcasting, and our share of wagering from our off‑track wagering facilities.”

Net revenue was $3.147 billion in 2017 compared to $3.034 billion in 2016.  Net income was $474 million in 2017 and $109 million in 2016.  Diluted earning per share were $5.07 in 2017 and $1.19 in 2016.

PENN has the largest portfolio of racetracks of any company in the United States.  PENN fully or partially owns Charles Town Races, Dayton Raceway, Mahoning Valley Race Course, Penn National Race Course, Freehold Raceway, Plainridge Park, Sam Houston Race Park, Valley Race Park, Casino Bangor, and Zia Park.  In 2018, PENN intends to acquire the racetracks owned by Pinnacle Entertainment:   Retama Park, The Meadows, and Belterra Park.

On December 17, 2017, PENN entered into “an agreement to acquire Pinnacle Entertainment, Inc., a leading regional gaming operator.  This transaction, which is expected to close in the second half of 2018…is expected to add eleven more properties to our holdings and to provide greater operational scale and geographic diversity…Under the terms of the agreement, Pinnacle shareholders will receive $20.00 in cash and 0.42 shares of PENN common stock for each Pinnacle share.”  However, that this deal will actually go through is by no means a near certainty.

The Federal Trade Commission has issued a second request for information pertaining to the proposed acquisition under the Hart-Scott-Rodino Act, which indicates that the Commission may have antitrust concerns.  The Motley Fool wrote on March 25, 2018:  “As the FTC itself says, the vast majority of deals reviewed by the agency and the Justice Department are allowed to proceed after the first, preliminary review.  Of the 1,832 transactions reported to the agency in 2016 (the latest data available), only 54 deals, or 2.9%, resulted in a second request for information.  Nor does the FTC or Justice Department typically involve itself in the gaming industry.  Of the 26 deals reported over the last five years involving the amusement, gambling, and entertainment industry, not one drew a second request.”

PENN’s common stock trades on the Nasdaq Global Select at a price-to-earnings multiple of approximately 5 to 1, in contrast to the average for the exchange of 26 to 1.  PENN’s abnormally low P/E ratio reflects the amount of risk in the stock:  a company with a negative net worth and one overwhelmingly dependent on debt financing in a period of rising interest rates, which may have a deleterious effect on PENN’s profitability and possibly its ability to meet maturing debt obligations.

Copyright © 2018 Horse Racing Business

Full Disclosure:  The author of this analysis, William Shanklin, is not currently a PENN shareholder.

CHURCHILL DOWNS, INC., 2017 OPERATING RESULTS

On February 28, 2018, Churchill Downs, Inc. (CHDN) released its annual Securities & Exchange Commission 10-K report of operations for 2017.

At the close of 2017, CHDN owned four racetracks outright and half of another, eleven off-track betting facilities, six gaming properties, and online businesses that encompassed TwinSpires, United Tote, Bloodstock Research & Information Services, and an interest in HRTV.  The casinos offered 4,200 slots, 55 gaming tables, 36 poker tables, 185 lodging rooms, and 775 poker machines.

CHDN racetracks were listed as Arlington Park (Chicago), Calder (Miami), Churchill Downs (Louisville), Fair Grounds Race Course (New Orleans), and a 50 percent  interest in Miami Valley (Dayton, Ohio), a harness-racing racino.  TwinSpires is the largest online wagering platform in the United States.

(In January 2018, CHDN completed the sale of Big Fish Games, a mobile gaming company, for $990 million in order to refocus on its core operations.  $500 million of the proceeds were earmarked for repurchasing CHDN’s common stock.  On February 28, 2018, CHDN announced that during the current year it will complete the acquisition of Presque Isle Downs & Casino in Erie, Pennsylvania, offering Thoroughbred racing and gaming, and Lady Luck Casino in Vicksburg, Mississippi.)

Net Revenues for 2017 were $882.6 million compared to $822.4 in 2016.  The racetracks and TwinSpires accounted for $512.9 million or 58.1% of total revenues.  Casinos contributed $350.5 million in net revenues (39.7%) and “Other Investments” the remaining $19.2 million (2.2%).

CHDN reported Net Income in 2017 of $140.5 million in contrast to $108.4 million in 2016.  Diluted Earnings per share were $8.77 in 2017 and $6.42 in 2016.

CHDN’s stock price rose from $142.37 at the beginning of 2017 to $239.55 at the close of the year, an increase of 97.2%, and thereby trounced all the major indexes.  (At this writing, CHDN stock is about $258 per share for an appreciation of close to 10% in 2018.)

While it is hard to quibble with the wealth that CHDN has created for its shareholders, there are three cautionary notes.

First, CHDN is highly leveraged, which makes it very susceptible to escalating borrowing costs in the present environment of planned interest-rate increases by the Federal Reserve (three boosts in 2018 and three more in 2019).  As of December 31, 2017, CHDN’s capital structure was comprised of 27% equity and 73% debt.  The heavy reliance on financing with debt will increasingly raise CHDN’s cost of capital.

Second, CHDN’s current price-to-2017-earnings ratio is around 30 to 1.  2018 earnings will need to meet the market’s expectations to maintain a 30 to 1 multiple.

Lastly, CHDN’s board chairman, G. Watts Humphrey Jr., is retiring from this position on April 24, 2018 and the board has elected insurance executive Alex Rankin to take his place.  (CHDN is in the minority of public companies with different individuals filling the slots of board chairman and CEO.)  Whether Mr. Rankin can continue the success of Mr. Humphrey remains to be seen, especially with a heavily leveraged company facing the headwind of rising interest rates.

Copyright © 2018 Horse Racing Business

Full disclosure:  The author of this article, William Shanklin, is presently a CHDN shareholder.