Archives for April 2010


At a recent corporate board meeting, a director said to the president, “You are on the back of a horse and it is running fast.” This metaphor reminded me how much the equine vernacular is so culturally ingrained into our everyday conversation. A fictional vignette demonstrating as much is fitting with the approach of the annual rite of Spring in America, the running of the Kentucky Derby on the first Saturday in May.

Erin had been away from the office for weeks on a European vacation but had returned now, refreshed and rearing to get back into harness. She wanted to come out of the gate as fast as possible on getting together a bid for a valuable but hard-to-please client. There would be no horsing around for the next several days, as it would be all business. Hard work would give her a leg up on the competition.

The previous proposal Erin had prepared for the client had turned out to be an also-ran, which saddled her with worry. “Horse feathers,” the ever-polite Erin averred when she heard of the client’s rejection. This individual was particularly hard to deal with, stubborn as a mule, and, in fact, sometimes could be a real jackass in jockeying for a more favorable outcome. The client demanded perfection and was always looking to rein in spending “lest we go in hock.” It balked at anything less. Erin bridled at that but mused to herself, “Just goes to show you that you can lead a horse to water but you can’t make it drink.”

Erin knew that the same old approach with this client would only be beating a dead horse, and it would stirrup trouble. This client was unusual, to say the least, a horse of a different color. Erin, in dealing with any client, did not like changing horses in midstream but that was absolutely necessary in this case. She needed a dramatic change of pace. That was her mane approach.

Erin’s colleague, Guy, offered to help with preparing the proposal in order to lend some additional horsepower. Not one to look a gift horse in the mouth, Erin readily accepted. She said: “Thanks so much Guy, you are like the cavalry galloping to the rescue.” Erin continued, “Guy, let’s re-conceptualize this proposal before we write a single word, so that we don’t put the cart before the horse. We are on the right track and just need to tweak the proposal a bit.”

Erin and Guy worked with unbridled energy for several grueling days, spurred on by the knowledge that two heads are usually more productive than one. They thought that the client would be receptive to some horse trading, to curb some services in the proposal in return for a lower price.

Finally, Erin told Guy, in reference to herself, “This old gray mare may not be what she used to be, but we are in the homestretch now on the proposal and are nearing the finish line.” Guy thought to himself, “Erin’s such a thoroughbred, she never nags her coworkers or offers lame excuses. She is smart as a whip and never engages in turf battles.”

Erin excitedly hoofed it home on Friday evening to hit the hay early, spurred on by her impending annual flight to Louisville, home of the star-studded Run for the Roses. It was time for some recreation, and Erin was headed for Churchill Downs…and some well-deserved horse play. Come to think of it, another Churchill, Winston, said that there is nothing as good for the inside of a man as the outside of a horse.

Epilogue: Erin and Guy submitted the proposal right under the wire. They won the contract, but just by a scant nose in a photo finish. Then they were really feeling their oats.

Copyright © 2010 Horse Racing Business


MTR Gaming Group operates Mountaineer Casino, Racetrack, and Resort in Chester, WV, Presque Isle Downs & Casino in Erie, PA, Scioto Downs in Columbus, OH, and RacelineBet, a national account wagering service. Mountaineer and Presque Isle are Thoroughbred racetracks and Scioto Downs is a Standardbred track. Mountaineer has a hotel, restaurants, a golf course, a fitness center, convention space and an entertainment center; it offers slots and table games. Presque Isle offers slots and table games but does not have a hotel. Scioto Downs offers pari-mutuel wagering only.

Total revenues declined by 5.3% from 2008 to 2009, from $478.8 million to $454.1 million. Gaming revenues fell from $418.1 million to $400.6 million (-4.2%); pari-mutuel commissions decreased from $14.5 million to $12.8 million (-11.4%); food, beverage, and lodging dipped from $36 million to $32 million (-11.1%); and other revenues declined from $10.3 million to $8.8 million (-14.9%). Operating income decreased from $38.2 million in 2008 to $$22.9 million in 2009, or by 40.3%. However, operating income for 2009 included charges for extraordinary items, most notably, $9.8 million for lobbying in Ohio and impairment losses of $10.4 million pertaining to non-operating real properties. The net loss was $22.5 million in 2009 versus a negative $17.7 million in 2008. Basic and diluted earnings per share were -$.86 per share in 2009 compared to -$.16 per share in 2008.

MTR Gaming Group is heavily indebted with 85.5% of its total capital structure being comprised of debt and only 14.5% in equity. The debt-to-equity ratio is 5.9-to-1. The debt position has worsened since 2008, when the debt-to-equity ratio was 4.5-to-1. The current ratio is 1.6-to-1.

The nearly $10 million that MTR Gaming Group spent in 2009 for lobbying in Ohio was for two purposes: to (unsuccessfully) support the legalization of slots at Ohio racetracks, so as to benefit Scioto Downs, and to stop a casino ballot that ultimately passed and authorized four full-scale casinos—in Cincinnati, Cleveland, Columbus, and Toledo. Therefore, all the lobbying was a failure.

In 2009, the governor and legislature of Ohio attempted to allow Ohio’s seven racetracks to install slots in 2010 via the Ohio Lottery (rather than have a statewide vote), but the Ohio Supreme Court blocked the effort. Instead, the slots issue at racetracks will be on the 2010 ballot. Whether Ohio’s new casino proprietor in Cincinnati and Cleveland (Dan Gilbert, founder of Quicken Loans and owner of the Cleveland Cavaliers of the National Basketball Association) will fund a campaign against the slots issue is unclear. Penn National Gaming has the rights to build casinos in Columbus and Toledo and owns Raceway Park harness track in Toledo as well, plus has just purchased Beulah Park Thoroughbred track in Columbus, so it is likely that Penn National will put money into getting the slots initiative passed in November 2010. One or more parties is already funding a group that is campaigning against racetrack slots, but the name of the donor or donors supporting the group financially has not surfaced. The Ohio Supreme Court stopped the Ohio Secretary of State from requiring the opposition group to reveal its donors.

MTR Gaming Group’s properties in West Virginia and Pennsylvania are vulnerable because much of their business comes from Northeastern Ohio and Western Pennsylvania. Ohio will in a couple of years or less have four new casinos, one in Northeastern Ohio in Cleveland, and Pittsburgh has a new casino, as does The Meadows, the harness track and casino just south of Pittsburgh in Washington, PA. All of these casinos are permitted to have table games in addition to slots. Finally, Harrah’s has a tentative agreement to purchase Thistledown racetrack near Cleveland. If Ohio legalizes racetrack slots, this venue will provide even more competition for MTR Gaming’s West Virginia and Pennsylvania casinos. MTR Gaming Group’s Scioto Downs in Columbus, OH would benefit greatly if slots were to be legalized, but voter assent is not a foregone conclusion. Without slots, it is doubtful that the racetrack can survive.

MTR Gaming Group is a heavily indebted company facing fierce existing and upcoming challenges to its core markets in West Virginia and Pennsylvania. On the one hand, the January 2010 legalization of table games in Pennsylvania will be a boost to Presque Isle Downs. Yet the addition of table games at casinos in Pittsburgh and Washington, PA will erode traffic at MTR Gaming Group’s nearby Mountaineer property in West Virginia. What’s more, the new casino in Cleveland will dissipate much of the Ohio traffic that otherwise would have gravitated to Presque Isle Downs and Mountaineer. The legalization of racetrack slots would be a big gain for MTR Gaming Group’s Scioto Downs, but the outcome of the ballot issue is a wild card.

MTR Gaming Group’s near-term financial outlook should improve along with the economy, at least until such time that the Cleveland casino opens in a temporary facility or a permanent site. MTR Gaming Group’s position in the face of so much increased competition is weakened considerably by the huge extent to which it is leveraged.

MTR Gaming Group’s common has traded in the past 52 weeks (Nasdaq.GS) in a range of $1.14-$4.15 and the closing price on April 23, 2010, was $2.05. At the current stock price, the view here is that it is overvalued.

Bill Shanklin is not currently an MTR Gaming shareholder.

Copyright © 2010 Horse Racing Business


Penn National Gaming (PNG) management describes its operations in the company’s most recent 10K, as follows:

“We are a leading, diversified, multi-jurisdictional owner and manager of gaming and pari-mutuel properties. We currently own or manage nineteen facilities in fifteen jurisdictions, including Colorado, Florida, Illinois, Indiana, Iowa, Louisiana, Maine, Mississippi, Missouri, New Jersey, New Mexico, Ohio, Pennsylvania, West Virginia, and Ontario. ..The vast majority of our revenues is gaming revenue, derived primarily from gaming on slot machines and, to a lesser extent, table games. Other revenues are derived from our management service fee 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 (‘OTWs’).”

In addition to its casinos, PNG owns racetracks: Penn National, Charles Town (West Virginia), Zia Park (New Mexico), Raceway Park (Ohio), Sanford-Orlando Kennel Club, Freehold (New Jersey), and Hollywood Slots Hotel and Raceway (Maine). It also owns four off-track betting facilities in Pennsylvania. In 2010, PNG purchased Beulah Park in Columbus, Ohio. The wisdom of this investment depends on whether Ohio voters authorize slots at Ohio’s seven racetracks in the November 2010 election. PNG will build two casinos in Ohio, in Columbus and Toledo, which were authorized by voters in November 2009.

For the year ended on December 31, 2009, PNG’s net revenues fell by 2.2% from 2008, or by $53.8 million. As with gambling per se, this decrease was attributed to economic conditions during 2009 that curbed consumer spending. PNG reported a net loss of $265 million in 2009, up from a net loss of $153 million in 2008. Diluted earnings per share were a negative $3.39 in 2009 and a negative $1.81 in 2008. PNG recorded a $6.1 million pre-tax loss in 2009 for insurance deductibles relating to the fire at its Empress Hotel.

PNG has a debt-to-equity ratio of .98 and 49.5% of its capital structure is debt. The company’s current ratio is a strong 2.18, meaning that it can easily meet maturing short-term obligations.

During the past 52 weeks, PNG has traded (on the Nasdaq exchange) in a range of $22.45-35.18. The stock closed on April 16, 2010, at $29.25 per share

Investment manager Martin Sass, who has $7 billion in his care, recently was quoted in Forbes magazine about PNG: “[Sass] owns Penn National Gaming and International Game Technology, both of which he figures will see increasing orders as state and local governments look to casinos to raise revenue. Penn National trades at eight times free cash flow. ‘[It’s] fairly priced based on present cash flow and earnings, but that gives no credit to cash flow and earnings coming onstream,’ Sass says. Penn National has projects opening in Maryland, Ohio, and Kansas in the next several years. Also, the Pennsylvania legislature just approved gambling [table games]. That’s not a bad catalyst.”

Sass’ assessment makes sense. With a turnaround in the economy and an increase in consumer spending on leisure and entertainment, PNG should turn profitable. Moreover, the expansion in Maryland, Ohio, and Kansas should eventually provide a boost in revenues and earnings. Another factor in PNG’s favor is that the company has very capable top management.

PNG is a long-term play for patient investors.

Bill Shanklin is not currently a shareholder of Penn National Gaming.

Copyright © 2010 Horse Racing Business