Dover Downs Gaming & Entertainment: Off to the races
If the names Richard Petty, Dale Earnhardt and Jeff Gordon ring a bell, then so should the name Dover Downs, the site of Dover International Raceway (or the “Monster Mile”) a long-time fixture on the NASCAR circuit. To race fans, Dover is synonymous with racing.
But Dover is more than a racing – much more. In fact, two companies stand where there was once one: Dover Motorsports (NYSE: DVD) and Dover Downs Gaming & Entertainment (NYSE: DDE). For investing fans, the latter holds the greater intrigue.
Dover Downs Gaming ($247 million in annual revenue) consists of Dover Downs Slots – a 97,000 square-foot video lottery (slots) casino complex; the Dover Downs Hotel – an admixture of luxury accommodations, conference hall, banquet, fine dining, ballrooms and concert hall facilities; and Dover Downs Raceway – a harness racing track with parimutuel wagering on live and simulcast horse races.
An appropriate description of Dover Downs is that it's not too hot (Las Vegas) and it's not too cold (Deadwood, South Dakota). It splits the market, though tacking more toward a luxurious Vegas flare. Most of its customers are drawn from the densely populated Mid-Atlantic states. Philadelphia, Baltimore and Washington, D.C. are all located within a two-hour drive.
Besides benefiting from a favorable geographic, Dover Downs also benefits from favorable legislative diktats. Only three existing horse racing facilities in Delaware are permitted a gaming license, while slot-machine operations are verboten in Maryland, Virginia and Washington, D.C.
But that's not to say competition isn't a concern; it is. Pennsylvania has roughly 10,200 slot machines in operation, with authorization allowing up to 61,000. More important, Maryland, which supplies Dover Downs with half its customers, is feeling pressure to raise revenue by legalizing slots.
These concerns, along with second-quarter earnings and revenue numbers that fell short of expectations, have pressured Dover Downs' stock since mid-July. In fact, shares have lost 25% of their value in the past three months, dropping to $11 at Friday’s close from $15 this summer.
The concerns, though legitimate, are likely overdone. In Thursday’s third-quarter conference call, management noted that Maryland has been proposing legalized slots for the past six years, but to no avail. This year the Democratic governor again ran the subject up a flagpole; no one saluted, especially the Republicans, who threatened to oppose the measure. The issue could go to referendum, but even then it wouldn't make it to ballot until 2008, and gambling referendums are notoriously difficult to pass.
In the meantime, Dover Downs keeps humming along. The company last week reported third-quarter results in line with consensus estimates. On that front, net income increased 6.3% to $7.44 million compared to $6.99 million for the third quarter of 2006, while revenues increased to $64.57 million compared to $61.68 million.
The top and bottom lines should continue to expand into the relevant future. The Dover Downs Hotel recently doubled the number of available rooms to 500 from 232. And of the original 232, all are expected to be completely renovated by the beginning of 2008. In addition, construction is underway on "The Colonnade," Dover Downs' phase six casino expansion, which will add approximately 70,000 square feet of casino, restaurant and retail space when completed next August. The expansion is expected to help double the company's historical annual sales growth rate to 8%.
To make the wait more tolerable, the board of directors upped the regular quarterly cash dividend by 11.1% to $0.05 per share, which marks the sixth time in the past five years the dividend increased. The board has increased the dividend at an average annual rate of 27% since it first authorized a dividend fin 2002. (Granted, it's starting from a small base, but it's still an impressive rate.)
Analysts' opinions on Dover Downs are mixed, if not schizophrenic. On June 19, Stifel Nicolaus analyst Steven Wierzcynski downgraded the company to “sell” from “hold.” Six weeks later, he upgraded it to “hold” based on current valuation and in a drop in price. In an accompanying note he stated that "shares of DDE have fallen over 20% since June 18. After the 20% correction, we now believe the shares are fairly valued."
Not to be out-vacillated, KeyBanc Capital Markets analyst Dennis Forst initiated coverage with a “hold” on July 10. Three weeks later, he upgraded his opinion to “buy” with a $15 price target. Two weeks subsequent to that opinion, he downgraded the stock to “hold,” stating that “the company’s share price may see downward pressure because of the debate over whether to legalize slot machines in Maryland.”
Jeffries analyst Lawrence Klatzin offers the most contemporary, if not rational, opinion. On Oct. 8, he raised his rating to “buy” based on valuation considerations and maintains a price target of $14 a share, though he couched his rating with concerns over the threat of legalized gambling in Maryland.
At this point, the “buys” outweigh the “holds.” The stock is far cheaper—based on traditional ratio metrics—than mega-resorts like Wynn Resorts Limited (Nasdaq: WYNN), Las Vegas Sands Corporation (NYSE: LVS) and MGM Mirage (NYSE: MGM). The business is also better run—based on return on equity and assets—than similar sized resorts MTR Gaming Group, Inc. (Nasdaq: MNTG) and Multimedia Games, Inc. (Nasdaq: MGAM). In other words, Dover Downs might just be the Goldilocks of gaming properties: Its valuation is just right.
