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Eric Houssels
Eric Houssels

Canterbury Park: Off to the Races….. Someday

May 17, 2007 | About:

I was surprised to discover a “gambler” more my speed recently - sleepy, little Canterbury Park (ECP).

Gambling-related stocks have been full of action over the last 3 or so years. We’ve had the WYNN and LVS IPO’S , the HET and STN go-privates, and many a toot for this and that gamemaker. The gambling industry has seen its valuations soar and have made many a participant very, very wealthy (look no further than Sheldon Adelson’s latest Forbes #3 ranking!) As a value investor, the current environment in the gambling stocks, even with their legitimately attractive growth profiles, is simply not for me: a different game is being played, not one tied to reasonable valuations that take into account very-much-for-real risks. I was, therefore, surprised to discover a “gambler” more my speed recently - sleepy, little Canterbury Park (ECP).

Canterbury Park is a racetrack and 50 table card room based in Shakopee, Minnesota. The company made nearly $4m after-tax in 2004 but the last 2 years have seen this number drop down closer to $3m (note: these are fully taxed numbers; no hide-and-seek is going on here). The company’s market cap currently hovers about the $55m mark, and the company pays out a modest dividend of approximately 1.8%. Business has been tougher the last couple of years with competition from the beautiful, Native American palace 4 miles down the road on the poker side and stay-at-home betters on the racing side. So what’s to like about this snoozer sputtering along and not trading for a dirt cheap valuation?

The answer is simple. Canterbury Park has a legitimate plan to redevelop their 380 acre asset (no debt, by the way), or a part thereof, into a structure much more valuable - a casino! Currently, the Native Americans have a monopoly on casino gambling in the very underserved Minneapolis/St. Paul market (the wild success of the Mystic Lake casino speaks to just how underserved the market is). Canterbury Park has had a plan for the addition of slot machines and full scale gaming on the legislative table since 1997. It is well known that slot machines have saved the racetracks (e.g. Delaware Park, Prairie Meadows) that have permitted them throughout the country by materially raising purses to a livable level; the horsemen of Minnesota, as well as those who race on the other tracks of the Midwest circuit, are big fans of the Canterbury Park slot machine proposal. Now, whether or not the horsemen community should be something the public listens to and supports is strictly a matter of opinion – and I will not offer mine.

The opinion I will offer, however, is one on behalf of the Minnesota taxpayer. Currently, the tribes of Minnesota, in aggregate, contribute out of the goodness of their hearts (it is not a statutory contribution but rather a purely voluntary one) a total of $16m to the Minnesota government. Canterbury Park’s latest proposal to the state calls for an upfront payment of $100m with ongoing annual gaming taxes estimates at $100m or over 6x annually what the Native Americans contribute altogether (and this is just for one gaming location and a smaller one at that, versus the Native American palaces). What is clearer than clear is that the Native American gaming tribes are shamefully ripping off the Minnesota taxpayer and Canterbury Park wants to be part of the solution to this injustice. In addition to just the cold hard cash Canterbury is offering, the company is also planning to build an Olympic horse park and agricultural event facility for the agricultural community to utilize.

Where does the taxpaying public stand on Canterbury’s plan? Opinion polls have repeatedly demonstrated their support for the project. This is a rational and expected response. Unfortunately, the Native American stranglehold on the legislature has blocked the peoples’ desires so far. The bottom line is simply that the taxpayers will be best benefited by the best deal, which is currently - by far and away - Canterbury’s. The glaring flaw in this rational support for Canterbury and Canterbury stock is that the Native Americans do have the wherewithal to best the Canterbury deal, which would, in turn, make it rational for the taxpayers to support them. This is a very real possibility and one that should not be taken lightly. The good news is that for Canterbury stockholders, there is a backstop.

Canterbury Park sits on 380 acres, a substantial portion of which is completely unused. This land is located in Scott County, which is one of the fastest growing counties in the entire country. The company owns this land, free and clear. Legitimate sources have appraised the land at $70m. This number speaks for itself. As a do-no-harm investor, a backstop like this allowing for 25% upside or, at least, minimal downside, provides for many a restful night of sleep.

In summary, Canterbury Park has been seeking the lollapalooza effects of a casino license since 1997; in 2003, they got closest to getting over the hump but did not prevail. In my opinion, they should get the license, as it is the right and rational decision for the taxpaying public of Minnesota. Elected representatives are charged with behaving in the best interests of their people, not in the best interests of their contributors; this situation represents a very obvious violation of this fundamental charge. However, if the current corruption were to persist indefinitely, Canterbury’s land prices materially higher than the debt-free market capitalization of the company; a profitable redevelopment for highest and best use would seem a near inevitability. While we wait for our something good to happen, honest, capable management will keep cranking out 3-4m per year and pay us a reasonable dividend. I believe value will unlock itself one way or another for the company; Canterbury Park will be off to the races… someday!

About the author:

Eric Houssels
Charlie Tian, Ph.D. - Founder of GuruFocus. You can now order his book Invest Like a Guru on Amazon.

Rating: 2.1/5 (7 votes)


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