Dover, Del. doesn't register as a tourist destination for most. Despite its proximity to Washington D.C., Baltimore, and Philadelphia, the city is far from the I-95 corridor and thus off the beaten path. Deep in the state's heart, it lacks Rehoboth Beach's sands, Newark's famous Blue Hens athletics, and Christiana's gargantuan mall. Instead, it's a state capital home to 36,000 residents and Delaware State University.
Dover does have at least one tourist attraction, though, and that's Dover Downs Gaming & Entertainment's (DDE) only property, the Dover Downs Hotel & Casino, which sits across DuPont Highway from Delaware State. Originally a NASCAR and harness racing track, Dover Downs added a casino with 500 slots in 1995. Six expansions later, it has grown to become the largest casino in Delaware, with over 2,500 slots, and the only one with a hotel attached. Like all Delaware casinos, it is nonsmoking and notably is allowed to offer a limited version of sports betting on NFL games, unlike its rivals in Atlantic City, N.J.
Today's Dover Downs Gaming & Entertainment can trace its roots to Dover Downs, Inc., which operated the pre-casino Dover Downs. In 2001, Dover Downs, Inc. spun off its gaming operations as Dover Downs Gaming & Entertainment and renamed itself Dover Motorsports (DVD).
The threat from Maryland
In the last five years, Maryland, home to many a Dover Downs patron, has quietly developed a gaming industry, ultimately approving six (initially) slots-only casinos, three of which are already open and dealing a huge blow to Dover Downs' revenue.
The next to open will be the $400 million Horseshoe Baltimore in 2014, which is being developed by a consortium including industry heavyweight Caesars Entertainment (CZR). Situated between the stadium homes of the Ravens (NFL) and Orioles (MLB) and near the famed Inner Harbor, this property (map) is sure to keep some tourists out of Delaware.
As Dover Downs management admitted in January's Q4 earnings call, the newest and largest Maryland casino, Maryland Live!, has poached Dover Downs customers from the eastern D.C. and Annapolis markets in the nine months it has been open. Located between Baltimore and Washington at Arundel Mills Mall, Maryland Live! does not offer sports betting and, like Dover Downs, does not allow smoking, but it will only become more competitive when it rolls out live table games on April 11.
Also during the Q4 earnings call, Dover Downs management revealed that year-on-year revenue decreased 20%, with Maryland Live! the "primary driver of slot [revenue] declines." Granted, members of the lowest tier of Dover Downs' player club were most likely to be drawn to Maryland Live! and its 4,750 slots, the newest 1,550 of which opened in September, a mere three months after the casino itself opened.
Indeed, the death knell for Dover Downs may well have been the simultaneous passage of Maryland's Question 6 and Question 7 referenda in November. The impact of Question 6 will be felt sooner; Penn National Gaming's (PENN) Hollywood Casino in Perryville, Md. was the first to open its tables, doing so on March 7, for example.
Alas, the impact of Question 7 may prove devastating. The yes vote for Question 7 means that a new Maryland casino can open as early as 2016 in Prince George's County and, more specifically, in the National Harbor entertainment district on the Potomac River, just eight miles from Washington and right off the Capital Beltway. Needless to say, National Harbor is close to the homes of many Dover Downs customers and is not far from countless tourist attractions.
The still-unnamed National Harbor casino, to be built by privately held Peterson Cos. and operated by MGM Resorts International (MGM), is set to be both luxurious and modern. With its 250 rooms, it will complement the rest of the National Harbor planned community, perhaps most notably the mammoth 1,890-room Gaylord National Resort & Convention Center owned by Ryman Hospitality Properties (RHP). Conventions are likely to buoy its results.
Dover Downs' second act?
Dover Downs management is not completely oblivious to the threats the company faces as a one-trick pony; however, the team's efforts to diversify the company's operations seem feeble at best.
The company's first foray outside Delaware is the Herschel's Famous 34 Pub & Grill in Athens, Ga., near the University of Georgia. With Georgia football legend Herschel Walker as its pitchman, this restaurant offers an unusually creative menu, featuring wings in Doritos nacho cheese sauce and a chicken finger sandwich made with banana cream-dipped French toast. It opened in January.
Management has invested $800,000 in the restaurant, and is expecting 20-30% returns on its investment. It hopes that the pub will develop into a chain. Unfortunately, the sports bar market is as brutal as it gets within the already-challenging casual dining arena. I wish Dover Downs the best of luck.
What Dover Downs does have to offer - and what it doesn't
Despite its uncertain prospects, at first glance, Dover Downs does hold some allure for the value investor. After plummeting from a 2006 high of nearly $20, it now trades at around $2.25, 36% below book value.
A closer look reveals, however, that at today's $72 million market cap, Dover Downs has a trailing P/E of 15 and a forward P/E of 11. By these metrics, it is no bargain, given its near-absence of growth prospects.
Announced last month, the $20 million sale of the Trump Plaza casino in Atlantic City, N.J., a beleaguered resort town not far north from Dover, is worth keeping in mind for some perspective. For one, $20 million is the lowest price ever for an Atlantic City casino. But more importantly, Trump Plaza cost $214 million to build and sits on one of the most centrally located parcels in Atlantic City, right at the foot of the Atlantic City Expressway leading to Philadelphia.
Trump Plaza and its Atlantic City rivals enjoy several competitive advantages over the Dover Downs Hotel & Casino. In the city made famous on the Monopoly board, every casino save for the bankrupt Revel allows indoor smoking. Moreover, Atlantic City is closer to Philadelphia and New York, and it has a beach, a boardwalk, and ample shopping to attract tourists.
The bottom line
Many would argue that Dover Downs is the classic cigarette-butt stock. Unappreciated by Mr. Market, the company is still viable for now, although its business is on the decline. The question is how many puffs it has left to offer, puffs in this case being dividend payments. Management seems committed to the dividend, but has had to cut it back with the deterioration of the Delaware gaming market.
I don't advise initiating a position in Dover Downs Gaming & Entertainment, and encourage investors to exit the stock, albeit gradually, considering that it is a low-volume micro cap. With the Horseshoe Baltimore and MGM resort at National Harbor, competition from Maryland is only intensifying, and it threatens to cannibalize the East Coast gaming market even further.
Unless Dover Downs manages to reinvent itself altogether - the pub venture in Georgia doesn't cut it for me - it's becoming quite apparent that game over is fast approaching.