Friday, March 21, 2008

Quick Analysis of Magna Entertainment's 10K

In a previous post, it was mentioned that Magna Entertainment's (Nasdaq: MECA) stock price was near a 52-week low, at 35 cents per share. It would seem at first glance that a gaming company that owns several horse racing and racino facilities couldn't be in such bad shape as to have its stock price fall 90% in a year.

To explore MECA's situation further, its recently filed SEC Form 10-K was reviewed for a few selected metrics dealing with liquidity, solvency and profitability for 2006 and 2007. The results are shown below.

With regard to liquidity, the three metrics evaluated were the current ratio, acid-test ratio and working capital.

Current Ratio: 2006/0.62 2007/0.58
Acid-Test Ratio: 2006/0.56 2007/0.54
Working Capital: 2006/($94.201M) 2007/($162.221M)

MECA's liquidity situation wasn't good in 2006 and got worse in 2007. At the end of 2007, MECA only had 58 cents of current assets to cover every dollar of current liability. Also, its working capital was over $162 million in the red. A healthy company wants current assets greater than current liabilities.

With regard to solvency, the three metrics evaluated were the solvency ratio, debt-equity ratio and the number of times interest earned ratio.

Solvency Ratio: 2006/1.47 2007/1.41
Debt-Equity Ratio: 2006/2.11 2007/2.42
NTIE Ratio: 2006/-0.50 2007/-1.18

It appears that MECA does in the aggregate have more assets than liabilities. The debt-equity ratio indicates that MECA is becoming more leveraged, with total liabilities almost 2.5 times that of the shareholders' equity. The NTIE ratio is also troubling, with the number not only negative, but becoming more so. A healthy company would have EBIT high enough so that earnings would cover interest expense. Not in this case as earnings are negative.

The final set of metrics deal with profitability, specifically EPS and cash and cash equivalents.

Earnings per share: 2006/($0.81) 2007/($1.04)
Cash and cash equivalents: 2006/$47.655M 2007/$34.315M

MECA is losing money and losing cash.

Overall, Magna Entertainment has issues with liquidity, solvency and profitability. Given the approximate 90% drop in share price over the last 12 months, these issues appear to be known by the street and have been factored in.

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Saturday, March 15, 2008

Horse Racing fans are old? So what else is new?

It is fairly well accepted that horse racing followers are getting older. There is a rumor, albeit unsubstantiated, that a valid AARP card is required for admission to racetracks. A couple of students at the University of Arizona did a survey of account wagering (ADW) providers back in 2005 that does put some academic rigor to the age distribution of horseplayers.

According to the survey, almost 60% of ADW customers are 46 and older, 30% are 56 and older. For a gaming industry that is facing increased competition from land-based casinos, internet casinos and lotteries, having an aging customer demographic isn't a good sign.

So it is not surprising that a couple of major horse racing companies, Churchill Downs and Magna Entertainment, have stock prices near 52 week lows. Churchill Downs (Nasdaq: CHDN) closed yesterday (3/14/08) at $42.64. Magna Entertainment (Nasdaq: MECA) closed yesterday at 35 cents (that's right, cents).

The industry has been working on measures to keep up, such as installing slot machines and becoming racinos. Depending on the venue, this has resulted in additional revenue. Some efforts, such as upgrading facilities and increasing purses, may have less correlation to increased revenue. ADW remains the key driver of any increased pari-mutuel handle.

Some tracks have made efforts to attract a younger demographic with lower admission, $1 hot dogs and beer, etc., but that appears only to have an impact on attendance for particular days, and not generating customer stickiness. On the ADW side, some have partnered with mainstream media websites to enhance the sport's visibility. Again, the improvement in the horseplayer demographic is debateable.

What is needed is something that can draw a younger and economically valuable demographic to the sport. This demographic shoudn't be just a spectator, but a wagerer as well.

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Saturday, March 8, 2008

Nevada Gaming Revenue Down Slightly From Year Earlier

A news article from references new data from the Nevada Gaming Commission that shows statewide, gaming revenues fell about 5% in January 2008 compared to January 2007. This is the first decrease in gaming revenue since 2001.

In 2001, we had an economic slowdown, exacerbated by 9/11. Since then, Nevada gaming revenues had been increasing until now. It is very likely that the cooling economy is partly to blame, fueled by the mortgage crisis, but it would not be surprising that the expansion of gambling globally, not just in the United States, is beginning to take its toll.

Asian gamblers, common to Las Vegas, may be headed to Macau instead. Other US customers, feeling the pinch of the economy, higher gasoline and food prices, etc., but still desiring to gamble, may be staying closer to home.

To stem this trend, Nevada establishments need to focus on differentiators to draw customers. Las Vegas has been focusing on non-gaming elements to draw customers for some time now. Large luxury hotels, spas, restaurants, entertainment, etc., are pulling in a larger share of overall revenue, relying less on gaming.

However, gaming is still a major draw and if new, innovative gaming products could be developed and deployed, it could serve as an attractant.

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