Washington investors who have been watching the Maryland slot machine debate and waiting for the chance to pump money into one-armed bandits need wait no more.
Instead of plunking quarters into slots, they can just buy the stocks of companies that are already familiar with the business of putting slot machine parlors in the parking lots of rundown racetracks.
If you like long shots, consider these:
MTR Gaming Group Inc., which owns the Mountaineer Racetrack and Gaming Resort in the West Virginia panhandle town of Chester, has seen its stock fall from $17.48 a share last spring to $6.43.
Dover Downs Gaming & Entertainment Inc., which owns Delaware's harness racing track and gambling complex, had a stock worth almost $15 a year ago, but now it's a $9.26 stock.
Penn National Gaming Inc., owner of the Charles Town racetrack and its countrified casino in nearby West Virginia, might as well have not left the starting gate. Penn National stock was $18 a share a year ago and has stumbled to $16.46.
Magna Entertainment Corp., the Canadian company that recently bought Maryland's Pimlico and Laurel racecourses, will need to hit a big jackpot to come up a winner. Its stock dropped from $14.44 a share to about $4.61 in the past 12 months as Magna rolled up a $14 million loss last year.
Maryland might well provide the pot of gold for Magna because the state legislature seems to be stampeding toward a slot machine bill that would provide a trifecta-size payoff for the owners of Maryland's three racetracks and a fourth to be built in the western tail of the state.
"Slot barns," as they are all too aptly called, are supposed to provide the magic that will transform such stock market nags as MTR, Dover Downs and Magna into thoroughbred investments and at the same time pull state budgets out of their deficit mire.
One thing is for sure: The slots at Dover Downs, Charles Town and Mountaineer certainly didn't pay off for stockholders in those tracks last year.
But an exclusive Maryland slot machine franchise might be different for Magna. Making money from slots in Maryland ought to be what The Washington Post's resident railbird Andy Beyer calls "a mortal lock," meaning a bet that can't lose.
Washington investment banker Jeffrey Hooke, who has worked up the numbers, calculates that the Maryland slot franchise could be auctioned off for $1.5 billion -- and maybe more -- even if the state taxes away half the take from the machines.
Hooke is one of the leaders of the Maryland Tax Education Foundation, a volunteer organization that does not advocate legalizing slot machines, but assumes they are coming. The group says its goal is to see that taxpayers get their fair share of slot revenue and the politicians in Annapolis do not give away the store.
Hooke estimates the Pimlico parlor alone could generate $639 million a year in what is known in the gambling business as "winnings." That's what the house wins, after paying out the jackpots carefully programmed into the machines. It doesn't include any money collected for parking, food or even horse racing.
If the state applied a 55 percent tax on that take, the Pimlico slot parlor owner would still net revenue of $288 million. Based on operating costs shown in the financial reports of the companies that own Dover Downs and Charlestown, Hook figures operating expenses for a Pimlico facility would come to about $120 million a year.
That would leave the owners about $168 million in annual operating income, a nice gross profit indeed.
Using that operating income as a starting point, Hooke calculates that Wall Street would give the Pimlico slot machine franchise a market value of around $1 billion. Since the business would be a start-up, with no track record, investors would knock about 30 percent off that value to reflect the risk of buying into a new business. Hooke's bottom line, then, is that the Pimlico park would be worth about $660 million. The Laurel track, also owned by Magna, would be work somewhat less. For comparison, the total value of the Canadian company is $493.8 million, based on Friday's closing price.
How does Hooke come up with his numbers? By looking at the financial reports of comparable companies and using the methodologies detailed in the textbook he has written, "Security Analysis on Wall Street," published by John Wiley & Sons.
So many numbers have been thrown around in the Maryland slots debate that riding through them is more like a steeplechase than a flat track race.
"Watch out for that water hazard" is a good warning. Many slot machine revenue estimates have been watered down to make it look like slots would not be as lucrative as they really are. It's in the economic interest of the track owners to lowball potential profits, so they don't have to pay so much for their franchise.
For example, Maryland officials have estimated that each slot machine would produce a daily "win" for the house of $217 to $375.
That might be true for slots out in Western Maryland, but it's way low for Pimlico, Laurel and Prince George's County locations, says Hooke after looking at the books of casinos in other urban areas and checking with state gambling regulators.
Citing figures from the Illinois Gaming Commission and the Michigan Gaming Control Board, he says the "win" per machine runs from $450 to $750 a day at slot parlors in convenient urban locations like Pimlico, which is in Northwest Baltimore. Even the slot machines on "river boats" in God-forsaken Gary, Ind., generate $300 to $500 per day apiece. Hooke uses a $500 per machine, per day "win" in his calculations.
He gives the Pimlico project a generous $400 million capital budget. Building a cheaper facility would make the business even more lucrative. Las Vegas-style glitz is not what Maryland is likely to get. Magna plans to build more than just a "slot barn," but don't expect Bellagio or MGM Grand.
Hooke figures Rosecroft Raceway, the Prince George's harness racing track, could get an even bigger benefit from slots because Virginians eager to play the games wouldn't mind gambling on whether the Wilson Bridge would be open. Laurel wouldn't draw many people from either Baltimore or Virginia and would end up being the least valuable of the locations, he said. (Interestingly, Hooke doesn't even factor in the difference between the horseback racing at Laurel and the sulkies that run at Rosecroft, which tells you how much horses have to do with slot machines.)
By his calculations, the three ventures together would be worth around $1.5 billion, which, he argues, is what the state ought to demand for the franchises.
That is such a valuable business that you have to question why Maryland wants to give away the franchise and especially why the politicians want to give it to the very people who have driven Maryland horse racing to the verge of extinction.
You don't have to be a student of horseflesh to understand that if, as everyone seems to agree, the horse racing business in Maryland is in trouble, some of the blame has to fall on the folks who have been running it. The longtime owners of the Laurel and Pimlico tracks have sold out to Magna, but they retain a stake in the operations and will share in any slot profits.
Magna itself is clearly gambling on Maryland and other states to bail the company out of the multimillion-dollar investments it has made buying run-down and unprofitable horse tracks around the country. The company has announced ambitious plans to build fancy new facilities in Illinois, Texas and Pennsylvania, but without slot machines, it's hard to see how any of those projects can succeed.
If Maryland is magnanimous with Magna, however, the company's stockholders will wind up in the winner's circle. Even if the state follows the hard-nosed advice dispensed by Hooke -- and I wouldn't bet on that -- the company will get an enormously profitable business and its stock price will leap.
Theoretically, the benefits of that success will trickle down to the grooms, jockeys, stable hands, horse breeders and everybody else in the business, all to the benefit of the state's economy.
If Maryland wants to give away hundreds of millions of dollars a year to benefit a beleaguered industry, why not start with biotechnology? Biotech is far more important to the state's economy than horse racing, and it, too, is in financial trouble. Or legalize online gambling to create business for the state's beleaguered telecom and computer companies. The entrepreneurs who made Maryland's Corvis Corp. and Ciena Corp. the industry leaders in fiber-optic equipment are at least as deserving of state aid as the people who ran horse racing into the ground.
Instead of Laurel, why not move the slots up the road to Baltimore-Washington International Airport. The airlines need all the help they can get, so let them put slots in the waiting areas.
Satirical as such suggestions may be, they are no more absurd than what is likely to happen in Maryland. The state is probably going to give away a $1.5 billion slot franchise at a bargain-basement price and give the big prize to shareholders of a Canadian company.