Taking a gamble on Dover Downs

Benj Gallander and Ben Stadelmann
Friday, January 25, 2013

There are many key ingredients to achieving high returns when investing in a stock. One of the most important parameters is the distinction between price and value. Price is what you pay, value is what you get. Benjamin Graham, arguably the father of value investing, considered this integral to investing success. Yes, we do have a predilection to favour people with the moniker Benjamin.

Take, for example, going to an NHL hockey game. The team with the most expensive tickets in the league is the Toronto Maple Leafs. In fact, the cost of going to their games, with all of the associated accoutrements, is also the highest. Given that the team has not reached the Stanley Cup final in almost 50 years and has the longest streak of any team in terms of not reaching the playoffs, it is obvious that people are paying a steep price for a minimal return. Taken to its logical conclusion, this has to be one of the worst values that a Canadian can purchase.

Also integral to investing is probability, and this is where the Leafs could get a big boost this season. The shorter the season is, the better the chance that a crappy team has of making the playoffs. Ideally for this outfit, the schedule would be one game long, with each winning team continuing to one-game playoffs. Then the Burkeless Buds would have a much better chance of hoisting Lord Stanley’s Cup. We can’t wait for the ticker tape parade!

All of this leads to one of our most recent buys: Dover Downs Gaming & Entertainment, which appears compelling on the price-value continuum. This enterprise, which is based in Delaware, garners revenue from its casino, racetrack and hotel complex. Recently, the going has not been so good. This is not because the probability of customers winning has increased, but the recession took its toll.

Competition has also increased dramatically. Previously, DDE was alone in its geographic zone, but two other casinos recently opened in Maryland, from whence 50 percent of Dover’s clients arrived. In addition, it will be closer for many Delaware residents to head to Maryland to rumba with Lady Luck, rather than staying in their own state. This, along with Internet gambling, has caused revenues to tumble, leading the company to cut the quarterly dividend from three cents to two.

Naturally, there are numerous reasons why this position was acquired. Though the bottom line has diminished, the company remains profitable. The debt level has been slashed by about one-third over the last three years. In addition, insiders own about 8 percent.

Critical to the purchase, the stock trades at about two-thirds of book value and there is no goodwill. This means that the price paid can be viewed in this regard as two-thirds of value. The market cap is a mere $73 million. A competitor such as Penn National Gaming, with better than $200 million in cash and a market cap exceeding $3.7 billion could easily swallow DDE without missing a trick.

Away from the financial statements, the nearby beach attracts tourists and Dover’s hotel, which is the largest in Delaware, has a fine reputation. NASCAR fans also sprint to the hotel for the two annual races that it hosts.

In December, Dover Downs was purchased for the President’s Portfolio at $2.01, one of the two portfolios that we manage. The Initial Sell Target is $7.74, a level where the stock traded for a good part of the last decade.

We believe that DDE will hit the target well before the carnival that is the Maple Leafs’ next Stanley Cup. While it is impossible to be certain, probability is definitely is in our favour.