Description

MTR Gaming (“MNTG”) is small-cap gaming company in Chester, WV. As of June 20, MNTG had a market cap of $270 million with 22.3 million shares outstanding at a price of $11.88. The company holds a near monopoly position in gaming in the northern panhandle of West Virginia and draws traffic from populated urban areas of the non-gaming states of Ohio and Pittsburgh. MNTG operates a horse racing track and “speakeasy” casino/hotel with a total of 2,000 video lottery terminal/slot machines (VLTs). It also operates two small hotel/casinos in Las Vegas and Reno enabling the company to become licensed in Nevada giving it institutional and financial credibility. Wells Fargo provided the company with a senior debt facility used to refinance expensive hedge fund debt and provide construction funds to expand the WV facility with additional hotel rooms and gaming areas.

1Q (March 2001) earnings were $4.3 million or .17 per share up 28% from the previous year. The Dec and March quarters are traditionally weakest for the company because of weather in the area. 1Q EBITDA increased 28% to $9.7 million. Win per machine was $240 per day, extremely high for the gaming industry where typical Las Vegas “Strip” properties will make $150 per day and “off strip” properties make as little as $50 per day. The high “win” is a function of lack of competition and tremendous demand.

Recently approved legislation allowed for an increased betting limit from $3 to $5 per play. The company has also applied for and will likely receive permission to add 595 machines. Both of these factors will increase revenues and earnings by an estimated 30%. A new 240 room hotel is under construction. Since the company essentially operates as a “partner” with the State of West Virginia Lottery System (which remotely monitors every cent dropped in a machine) there is little risk of further competition. The State only allows VLTs at four horse/dog racing tracks scattered throughout the state.[This is Buffet’s “moat.”]. The State is addicted to the revenue it receives. Although there is risk to the company if Pennsylvania or Ohio were to allow slot machines at certain locations it is considered politically unlikely. PA voters defeated a 1999 statewide referendum expanding gaming.

At a conference call on May 2, the company’s Chairman answered questions from several analysts (MNTG is covered by CIBC and FBR). Based on an increase in the number of machines and higher betting limits it is likely the company will generate close to $1.50 in EPS in calendar 2001. Analysts are calling for just under a $1/share in 2001 and up to $1.50 in 2002. At an industry comparable PE of 15 a price of $15-$25 is likely in the next 18 months.

At current price the company is trading at a PE of 6.6 times 2002 earnings and 3.6 times potential 2002 EBITDA of $60 million. Gaming company EV range from 5-8 times EBITDA (The company’s monopoly position would indicate a sale at the higher end of this range) a potential value of $480 million minus debt of $60 million = $17.50.

The company would make an outstanding acquisition for a larger gaming company; MNTG could also generate capital gains from the sale of its Nevada casinos to pay down debt/reinvest in WV.

Management is very incented with 25% of fully diluted shares. At some point they will realize the fruits of their efforts and maximize value for shareholders by selling the company. Although the stock has rallied significantly in the last 60 days it still trades at a 40% discount from potential acquisition value.

Catalyst

Rising earnings, expanding facility, increased betting limits, increase in number of slot machines, increased market visibility, intermediate term safety of monopoly position, great acquisition candidate.