CANTERBURY PARK HOLDING COMPANY–BUY, SELL, OR HOLD?

Canterbury Park Holding Company is traded on Nasdaq under the symbol CPHC. The Company was founded in 1994 as a racetrack conducting pari-mutuel wagering on live Thoroughbred and Quarter Horse racing and full-card simulcasting. The live racing season runs from May to September and simulcasting is held all year. Although Minnesota law requires CPHC to schedule a minimum of 125 days of live racing annually, the Minnesota Horsemen’s Benevolent and Protective Association can agree to a lesser number of live racing days. Since 1995, the MHBPA has permitted the CPHC to run a live meet of at least 50 days each year.

In 2000, CPHC added Canterbury Park Card Club. Presently, CPHC has about 34 poker tables and 16 tables offering casino games, which is the maximum number of 50 permitted by Minnesota law. The Card Club is open 24 hours per day all year. CPHC deducts 5% or 10% from card-game bets, depending on the pot limit, but has no interest in the outcome of a game (a so-called “unbanked” operation). It also imposes charges for hosting the games.

The Company is located on 380 acres in Shapokee, Minnesota, 25 miles from downtown Minneapolis. Until 2005, CPHC was the only pari-mutuel facility in Minnesota. Then the North Metro Harness Initiative opened Running Aces Harness Park in Anoka County, Minnesota, 50 miles from CPHC. CPHC management stated in its June 30, 2009 10Q report: “The Company believes patronage at Running Aces card room has had a material adverse effect on the Company’s card room revenue.”

In 2008, card games accounted for 52.3% of CPHC revenues, pari-mutuel wagering contributed 28.8%, 12.9% came from concessions, and the rest derived from parking/admissions, publications, special events, and a recreational vehicle park.

CPHC’s net revenues for the past three years were: 2008, $46.0 million; 2007, $52.9 million; and 2006, $55.8 million. Net income was $438,000 in 2008, $2.6 million in 2007, and $3.1 million in 2006. Earnings per share on a diluted basis were 11 cents in 2008, 62 cents in 2007, and 74 cents in 2006. For the first six months of 2009, net revenues were $19.4 million, net profits were $291,575 and earnings per share were 4 cents per share.

The Company has a strong balance sheet. Only about 25.1% of its capital structure is represented by debt and its debt-to-equity ratio is 33.5%. These ratios increased from December 31, 2008, when debt was 17.3% of the capital structure and the debt-to-equity ratio was 20.8%. As of June 30, 2009, CPHC had a current ratio of 1.29.

As for CPHC strategy, the Company states:

“We have a strong commitment to live racing and have been particularly successful in attracting new customers and providing a quality live racing experience for our horse racing fans as well as the horsemen who participate in the live racing at Canterbury Park. The success of the Card Club has greatly enhanced our ability to offer a more competitive purse structure for live racing and has allowed us to make significant improvements to our grandstand and the backside stabling and training facilities. As a result, we have been near capacity for horses stabled at Canterbury Park during our recent live race meets.

 We continue to believe that our best option for long-term growth is to gain authority under Minnesota law to offer additional gaming options, which would enhance horse racing with increased purses, provide growth and development opportunities, and produce significant new tax revenues for state and local governments. The effort to obtain legislative authority for these initiatives has required, and will continue to require, substantial expenditures. Due to the inherent uncertainty of the outcome of legislative activities, there can be no assurance that any bills favorable to the Company’s interests will be enacted into law, and it is possible, as a result of the legislative process, that legislation directly or indirectly adverse to the Company may be enacted into law.”

In the most recent 52 weeks, CPHC has traded in a range of $5.20-$7.58 and its current price-to-earnings ratio is 175. On Friday, October 23, 2009, the stock closed at $7.00.

CPHC is a financially strong company in a good competitive position because it is one of only two pari-mutuel facilities in Minnesota. In addition, its gaming options are diversified between the card room and the horse racing. The judgment here is that investing in this company does not have a lot of upside potential, as CPHC does not have scalability: the number of poker and casino tables it can install is limited by law. Moreover, the pari-mutuel business at CPHC is not a high-growth enterprise. On the other hand, CPHC has a strong balance sheet and is a relatively safe investment for the individual who is seeking steady but unspectacular returns.  Further, there is the possibility that the state of Minnesota will authorize CPHC to offer additional gaming options, such as slot machines, and in this case the value of CPHC will increase dramatically.  An investor’s task in evaluating CPHC is to research and weigh the probability that Minnesota will legalize more gaming options.

Bill Shanklin is not a shareholder in Canterbury Park Holding Company.

Copyright © 2009 Horse Racing Business

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