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Mario Gabelli Betting on a Small-Cap Stock

February 02, 2014 | About:
Patricio Kehoe

Patricio Kehoe

7 followers

On Jan. 29, Mario Gabelli (Trades, Portfolio), the chairman and chief executive officer of GAMCO Investors Inc., added Canterbury Park Holding Corporation (CPHC) at an average price of $10.99 and currently holds 463,507 shares of the stock. He is betting in favor of the gaming industry which will continue to show improvement this year.

A Number of Projects

Canterbury Park Holding conducts pari-mutuel wagering operations and hosts unbanked card games at its Canterbury Park Racetrack and Card Casino facility (the Racetrack) in Shakopee, Minnesota. The company divides its business into three segments: horse racing, Card Casino and Concessions segment.

The new legislation increases the revenue potential of the Card Casino and the Cooperative Marketing Agreement with the Shakopee Mdewakanton Sioux Community which will substantially increase purses at the Racetrack in the future. Moreover, new projects includes an  upgrading of the live racing experience through the installation of a new, state-of-the-art tote board featuring 150 feet of digital signage and a jumbo HD video board. The company also plans to improve marketing capabilities and operating efficiencies through the installation of a new Customer Relationship Management system. Finally, on December, the company was upgraded by investment analysts at Thomson Reuters/Verus from a “hold” rating to a “buy”.

Valuation

In terms of valuation, the stock sells at a trailing P/E of 40.8x, trading at a premium compared to an average of 22.6x for the industry. To use another metric, its price-to-book ratio of 1.7x indicates a little discount versus the industry average of 1.71x and the price-to-sales ratio of 1.0x is below the industry average of 1.5x.

Earnings per share (EPS) decreased 20% in the most recent quarter compared to the same quarter a year ago but since 2011 it has demonstrated a change in the pattern. We include in the next graph the stock price because EPS often lead the stock price movement.

We have to mention that compared to its closing price of one year ago, the stock price is up, but far from exceeding the performance of the market.

Finally, I always like to see one of the most important financial ratios applying to stockholders, the best measure of performance for a firm's management: the return on equity. The ratio has increased when compared to its ROE from the same quarter one year prior. Currently, a ROE of 3.8% is higher than 59% of the companies in the Gambling industry. Although is a very low ratio, is still better than the one that shows MTR Gaming Group, Inc. (MNTG), which has a negative ROE of 42.5% which is clearly not attractive.

Final Comment

The firm’s revenue growth has slightly outpaced the industry average. Although it has not demonstrated a clear trend in earnings over the last years, new projects will have a positive impact over the next years. An important fact is that cash to debt ratio is very low at 0.00, implying that there has been very successful management of debt levels which we considered as a good signal.

We have to mention as well, that casino gambling is now legal in more than 20 states. As a consequence, gaming machines are allowed at U.S. racetracks and other venues. This should also benefit the company.

 

Disclosure: Patricio Kehoe holds no position in any stocks mentioned.

 

 

About the author:

Patricio Kehoe
A fundamental analyst at Lone Tree Analytics

Rating: 4.6/5 (7 votes)

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