MTR GAMING GROUP, INC. — BUY, SELL, OR HOLD?

MTR Gaming Group, Inc. owns Mountaineer Casino Racetrack and Resort (formerly Waterford Park) in Chester, West Virginia, on the Ohio River.  It offers slots, table games, poker, and Thoroughbred racing at this facility. The Company opened Presque Isle Downs in Erie, Pennsylvania, in 2007 with a casino complex, restaurants, and a racetrack with a Tapeta synthetic surface designed by former trainer Michael Dickinson. The cost of Presque Isle Downs was approximately $294 million.  MTR Gaming Group ‘s Scioto Downs is a harness track in Columbus, Ohio. The Company is a 50% owner in Running Aces Harness Park in Minneapolis, Minnesota. In 2008, the Company closed Jackson Harness Raceway in Michigan and sold two Las Vegas properties: Ramada Inn and Speedway Casino and Binions’ Gambling Hall & Hotel.

Mountaineer Casino Racetrack and Resort has 3,220 slot machines (located in both the casino and the nearby racetrack), 55 table games, 40 poker tables, 359 hotel rooms, a spa, a fitness center, dining facilities, including an upscale steak house, bars, a 69,000 square-foot theater and events center, and a 13,500 square-foot convention center.

Mountaineer is 35 miles west of Pittsburgh, Pennsylvania, and 40 miles south of Youngstown, Ohio. Pennsylvania recently legalized slot machines and The Meadows Racetrack and Casino in Washington, Pennsylvania, is only 40 miles from Mountaineer. The Meadows has slots but is not permitted table games.

Presque Isle Downs is located on 272 acres (58 of which are open space) and has a 140,000 square-foot clubhouse that offers 2,000 slot machines with authorization for 3,000. The racetrack is situated adjacent to the casino. Presque Isle Downs has fine and casual dining. Erie, Pennsylvania, has 3,000 hotel rooms. Living within 90 miles of the complex are 2.2 million people and the nearest competitor is 75 miles away.

Scioto Downs in Columbus, Ohio, is a pari-mutuel harness racing track. Running Aces in Minneapolis, Minnesota, has harness racing and a 50-table card room in which players bet against one another rather than the house.

For the year ended December 31, 2008, MTR Gaming Group increased revenues over 2007 by 13.2%–from $415.8 million to $470.8 million. Gaming comprised 88.8% of revenues and pari-mutuel commissions accounted for 3%, with the remainder coming from food, beverage, lodging, and other.

Operating income increased from $26.6 million in 2007 to $38.2 million in 2008, or by almost 44%. However, because of losses from the discontinued operations in Michigan and Nevada, the Company had a net loss of $17.7 million in 2008 ($.65 per share), compared to a net loss of $11.4 million in 2007 ($.41 per share). MTR Gaming Group had net income of $7.8 million and $4.5 million in 2005 and 2006, respectively.  By agreement with its lenders, MTR Gaming Group cannot pay a dividend on its common stock unless the creditors approve.  The Company has stated that it intends to retain all earnings.

In 2008, EBITDA (earnings before interest, taxes, depreciation, and amortization) was positive for Mountaineer ($51.4 million) and Presque Isle Downs ($33.5), but negative for Scioto Downs (-$1.4 million).

At the close of 2008, MTR Gaming Group had a capital structure comprised of 81.9% debt; in 2007 the corresponding figure was 81.5%. This debt load was up significantly from the previous three years–73.2% in 2006, 63% in 2005, and 58.4% in 2004–because of the building of Presque Isle Downs. In its most recent 10Q filing for the first quarter of 2009, the Company states as a major risk: “Our substantial indebtedness could adversely affect our financial health.”

The Company had a positive cash flow for 2008 from operations, but interest on its debt resulted in a negative cash flow overall. Another risk factor is that  the company is being sued by a jockey injured during a race at Mountaineer. Management believes that its liability insurance is sufficient to cover an adverse court decision but is not certain.

In May 2007, MTR Gaming stock was trading at about $16 per share.  Its 52-week range is $.73-$7.23 per share. The stock closed at $1.08 per share on April 9, 2009.

MTR Gaming Group had the unfortunate timing of taking on huge debt to build Presque Isle Downs in 2007, just prior to the downturn in the U. S. economy. Compounding matters, The Meadows Racetrack and Casino added slots at its harness racing track, and this decreased the attraction of Mountaineer Casino and Racetrack to Pittsburgh-area customers. Still, Mountaineer has the advantage of having table games and poker, which, under Pennsylvania law, The Meadows cannot offer. Even so, MTR Gaming’s indebtedness, coupled with the economic malaise, prevents the company from taking on more debt to build the additions needed at Mountaineer to offer first-class facilities for poker and table games. An additional stock offering is not practical to raise funds to pay down debt because of the Company’s depressed stock price and the economic uncertainties that are affecting all gaming firms in the United States.

Scioto Downs is an underperforming property that could be closed or sold when better times come around. It is highly unlikely that Scioto Downs will be permitted to to install slot machines, at least any time soon. The casino ballot initiative that Ohioans will likely vote on in November 2009 will be for casinos only in four major cities (Penn National Gaming’s Raceway Park in Toledo is a proposed site).  There is a bipartisan move underway in the Ohio legislature to allow the state’s racetracks to install slots without a voter referendum, but the governor has indicated that he would likely exercise his veto.

MTR Gaming Group has pursued the same debt-financed path to rapid growth that most of the leading casino companies have employed.  Now, with the slowing economy and worldwide credit freeze, MGM Mirage, Harrah’s, and Las Vegas Sands are in danger of defaulting on their debt and Trump Entertainment Resorts and Magna Entertainment Corporation are in bankruptcy. 

The view here is that MTR Gaming Group stock is a risky play but one with plenty of upside potential. The Company has gotten rid of several subsidiaries that were incurring losses or barely earning a profit. If the Company can survive the present economic situation, business at its casinos in Erie, Pennsylvania , and Chester, West Virginia, will pick up. These are both facilities with a lot to recommend them in terms of market advantages. The Company would then have the cash flow to begin to get out from under some of the debt. This would probably not be enough, however, given the sizeable interest on the debt, and a stock offering would also be necessary.  Another option for MTR Gaming Group is to try and sell either Mountaineer Casino Racetrack and Resort or Presque Isle Downs to raise cash.  Other gaming companies have pursued this path, such as MGM Mirage, which sold Treasure Island in Las Vegas and may sell its casino operations in Michigan and Mississippi. 

By contrast, there is a troubling probability that if the economic situation does not improve dramatically in the next year, MTR Gaming Group would be unable to cope with its mountain of debt. In that case, the Company’s common stock would be subordinate to the debt holders in any court-supervised reorganization plan.

From an investor’s viewpoint, MTR Gaming Group’s stock is similar to casino stocks in general:  potentially lucrative turnaround plays fraught with risk.  It is uncertain whether the Company can continue to make the payments on its debt during the current economic slowdown.  A prolonged pullback in consumer spending and increases in unemployment could push the Company into bankruptcy.  Conservative investors who need their portfolios to live on now or in the near future should stay away from this stock.  However, aggressive investors could see a great deal of price appreciation in MTR Gaming Group stock once consumers are willing and able to spend more on entertainment.

Copyright © 2009 Horse Racing Business

Disclosure: Bill Shanklin is not currently a shareholder in MTR Gaming Group but has owned shares in the past.

Speak Your Mind

*