Archives for March 2018


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.


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.


The first equus caballus ever cloned was in 2003 and prominent sport-horse competitors have zealously exploited the technology.


The breeding of Thoroughbred racehorses is mandated to be by natural cover if the foal is eligible to be registered…and that has always been the case.  Whereas Standardbred and Quarter Horse registries allow for artificial insemination, Thoroughbred registries around the world do not.

Some participants in the sport of polo have gone much further, as highlighted in a March 11, 2018, segment on CBS-TV’s 60 Minutes.  Correspondent Lesley Stahl traveled to Argentina and Texas for the story.

The world’s best polo player for the past 22 years, Adolpho Cambiaso, teamed up with Texan Alan Meeker to clone outstanding polo ponies, such as Cambiaso’s ill-fated stallion Aiken Cura, who was humanely destroyed after breaking his leg in a 2006 polo match.  Before Aiken Cura was euthanized, Cambiaso had a veterinarian extract some of the stallion’s cells for cloning.

Cambiaso’s 17-year-old retired mare Cuartetera is widely hailed as the best polo pony of all time,  So far, Cambiaso and Meeker have fourteen clones of her with ten more planned for 2018 and the same number in 2019.  The clones are sequentially named Cuartetera 01, Cuartetera 02, and so on.  All have been born to surrogate mares.

The clones are very similar to the original Cuartetera in appearance, athletic ability, and disposition.  They have no special health problems and the infant mortality rate for cloned horses is only slightly higher than for foals born via natural breeding.

In the final match at the 2017 Argentine Open, members of the winning Cambiaso team all rode clones while their opponents were mounted on naturally bred ponies.  Cambiaso scored the winning goal in the sudden-death climax aboard Cuartetera 06.  Stahl raised the issue of whether Cambiaso had an unfair advantage in that every pony available to his team was a clone of the great Cuartetera?

Cambiaso’s business partner Meeker was asked about religious and moral objections to cloning.  He replied that he disagreed with human cloning but added:  “I’ve been asked by some of the wealthiest people on planet earth to clone a human being…and the answer is always a resounding ‘no.'”  Meeker predicted that someone will eventually take this controversial and troubling step…though he would not be the one to do so.

It is highly likely that Thoroughbred registries will continue to adhere to the natural method of contraception if for no other reason than to protect stallion fees.  Meanwhile, other sport-horse registries will persist with artificial insemination, embryo transplants, and, in many cases, cloning.

Despite concerns about the ethics and possible unintended consequences of animal cloning, I do wonder how, say, Secretariat 02 and 03 would do racing against one another and Man o’ War 07 in a future Kentucky Derby or Belmont.  And if we want to get into the Twilight Zone and an ethical/moral quagmire, how about if they were ridden by Ron Turcotte 02, Ron Turcotte 03, and Clarence Kummer 02.

While this scenario is farfetched and perhaps scary, it is nonetheless within the capabilities of extant science and technology rather than in the more comforting domain of science fiction.

Copyright © 2018 Horse Racing Business