Canterbury Park Holding Stock: Hold For Now (NASDAQ:CPHC)

I am giving Canterbury Park Holding Corporation (NASDAQ:CPHC) a HOLD rating because I think that the stock is currently overvalued from a liquidation as well as from a discounted cash flow standpoint. Currently CPHC is not allowed to have slot machines in their casino as they have been exclusively licensed to Minnesota’s Native American Tribes. Legislation has also been introduced to allow sports betting in Minnesota however, as the bill is written it would exclude any casinos except for ones owned by the Native American Tribal communities. Both of these legislative exclusions severely restrict CPHC from future cash flow growth but, if any of these restrictions to how CPHC runs its casino were to be lifted the share price of this company would likely see a large increase as their future casino revenues would almost certainly rise dramatically.

About Canterbury Park Holding Corporation

Canterbury Park Holding Corporation owns a large horse racing track in Shakopee, Minnesota. Wagers for CPHC’s horse races can be placed not only for races that occur at CPHC’s track but at tracks across the country all year long through CPHC’s year-round simulcasting of horse races. Complimenting their Horse Racing segment is Canterbury Park Holding Corporation’s Casino segment. CPHC’s casino offers unbanked card games at up to 80 tables such as Blackjack, Mississippi Stud, Fortune Pai Gow, Three Card Poker, Four Card Poker, Ultimate Texas Hold ‘Em, EZ Baccarat, Criss Cross Poker, Free Bet Blackjack, DJ Wild, and I Luv Suits, with betting limits ranging between $1 and $300. As previously mentioned CPHC does not have the legal ability to place slot machines in their casino as Minnesota’s gambling laws only allow Native American Tribe owned establishments to have slot machines.

CPHC has a food and beverage segment that consists of concession stands, restaurants and buffets, bars, and other food venues, as well as café style restaurants and full-service bars within the Casino and simulcast areas.

CPHC’s Development segment is currently engaged in finding the best potential uses for CPHC’s unused land surrounding its racing track and casino. Over the last five or six years CPHC has been selling off plots of its land for upscale apartments, a senior living community, a corporate office building, a building that is currently being leased as a restaurant and brewery, and land for what will be one of Minnesota’s largest amphitheaters. Most of these land sales come with a percentage of ownership in the new business venture taking place on the property.

Canterbury Park Holding Corporation’s Business Operations

Horse Racing

CPHC’s Horse Racing business segment, referred to as their pari-mutuel revenues, saw a 24.7% decrease year over year from $10.95 million to $8.25 million. A large part of this decrease is due to the fact that CPHC went from hosting 64 races in 2022 to 53 races in 2023. CPHC had joined other race tracks and casinos in Minnesota to advocate for the right to place slot machines in their casinos until 2012.

In 2012 the Sioux community of Native Americans entered into a collective marketing agreement with Minnesota’s horse racing and casino establishments to pay purse enhancements to increase race winnings as well as provide some additional funding for marketing the races. This agreement was made under the precondition that Minnesota’s horse racing and casino businesses cease to advocate for slot machines in their casinos. The payments started off at $5.9 million and increased annually. These payments for purse enhancements and marketing ballooned to $8.9 million annually from 2019-2022. In an attempt to keep purse payments high now that this purse enhancement agreement has ended, CPHC has decreased racing days.

Casino

CPHC brought in $40.21 million in casino revenues in 2022 as compared to $39.78 million in 2023. Despite the absence of 11 racing days CPHC’s casino revenues seemed to hold up rather well year over year. Of this $39.78 million CPHC made $10.49 million was from Poker related games and $29.29 million was from other table games.

There is another form of betting that is being introduced into CPHC’s casino. Historical horse racing machines have been approved as of early April, 2024 to be put into Canterbury Park starting May 21st, 2024. These machines should provide a boost of income for CPHC’s Casino segment however there is another couple of bills looking to legalize sports betting in Minnesota that could, as they are currently written, detract from CPHC’s ability to maintain and grow its customer base. The first of these two bills on the table would cut CPHC into sports betting but this bill seems to have almost no support in the Minnesota state legislature. The second bill which very well may pass as it has the support of many of Minnesota’s college sports teams behind it as well as Native American Tribal support gives the Tribes the exclusive control over both retail and online sports betting.

If CPHC becomes excluded from the ability to participate in Minnesota’s new sports betting market this would almost certainly have negative implications for their casino. Sports betting is a prime opportunity to bring in new customers from this rapidly growing new leg of legalized gambling. The exclusion of sports betting inside of CPHC’s casino could also mean that return customers could begin spending more time or all of their time at the state’s other casinos that offer more ways to gamble. If you take a big trip to the casino with a bunch of your friends, all of whom have different gambling preferences what casino is going to win out? The casino that only has skilled table games? or the casino that has slots and sports betting? Probably the casino with the most stuff to do, right? For reasons of legislative exclusion alone I would not be buying CPHC’s stock until we have more information regarding the probability of CPHC being included or excluded into sports betting legislation.

Food and Beverage

CPHC’s food and beverage segment saw a decrease of 4.8% from $8.23 million in 2022 to $7.88 million in 2023. This decrease was largely associated with the absence of the Twin Cities Summer Jam which is a large annual festival that adds significantly to CPHC’s Food and Beverage segment revenue. The Twin Cities Summer Jam is scheduled to happen this year and should help boost year over year revenues for this segment.

Property Development

Triple Crown Residences

CPHC’s property development part of its business plays an important role in the development and retention of its future racing and casino businesses. In 2018 CPHC began a joint venture with an affiliate of Doran Companies, a real estate developer, to form Doran Canterbury I, LLC. This partnership was formed in order to build a high end apartment complex on 13 acres of Canterbury Park property to be called the Triple Crown Residences. CPHC contributed 13 acres of their land in exchange for a 27.4% equity stake in Doran Canterbury I, LLC. Initial occupancy of the building began in June of 2020 and all units were available for occupancy as of December, 2021. CPHC recorded an income related to this property of $1.98 million in 2022 and $1.72 million in 2023.

In August of 2018 Doran executed part of its operating agreement that began the process of building another apartment complex under the company name Doran Canterbury II, LLC. CPHC contributed 10 acres of land in July, 2020 for a 27.4% equity in the new venture. Ground work began in late 2020 and by March 2022 the construction on the apartments officially began. Initial occupancy is supposed to take place in January of 2024. I would be watching closely for CPHC’s 2024 Q1 to drop to see if everything is going according to plan.

Canterbury DBSV Development, LLC

Together with an affiliate of Greystone Construction, CPHC started a joint venture called Canterbury DBSV Development, LLC in June of 2020. CPHC contributed 13 acres of land in exchange for a 61.87% equity stake in the company. Over the course of the next couple of years Canterbury DBSV Development, LLC built a 28,000 square foot office building, with Greystone occupying the second floor as its corporate headquarters on 1.5 acres of land. This building was completed in 2021 and has a 90% occupancy rate. Canterbury DBSV Development, LLC also built an 11,000 square foot building that is occupied by a local restaurant and brewery that has been in operation since July of 2023.

In Q1 of 2022 Canterbury DBSV Development, LLC transferred 3.5 acres of land over to a joint venture called Omry Canterbury, LLC for a 147-unit senior living community. This facility is supposed to begin occupation in Q4 of 2023 and we should be able to begin to take a closer look at this senior living center soon. Canterbury DBSV also sold approximately 1.7 acres of land to A&M Kerber Holdings, LLC for $925,000 for the construction of a Next Steps Learning Center and child care facility. This child center is also supposed to have begun operations in Q4 of 2023.

Pulte Homes

In April of 2020 CPHC sold off 14 acres of its land to Pulte Homes for $3.5 million. This plot of land is supposed to hold 109 new row homes and townhomes. The first of these houses were completed in Q1 of 2022 and as of December 31st, 2023 50 of these homes have been completed.

Amphitheater

In September of 2021 CPHC sold off 37 acres of land for $8.8 million to the Swervo Development Corporation so that a state of the art 19,000 person amphitheater could be built on Canterbury commons.

Discounted Cash Flow

I ran a discounted cash flow assuming a 10% WACC, capital expenditures at 8.5% of revenues, EBIT margins at 10.8%, an average tax rate of 29.5%, D&A expenses averaging $3.1 million a year, a change in the increase to working capital as a percentage of revenue increase of 10%, and an average revenue growth rate of 2.8% year over year which includes CPHC’s perpetual growth rate.

After punching in these numbers I got a price target of $10.66 compared to the current share price of $23.70, a 55% decrease. This could begin to change as we see the effects of CPHC’s real estate development ventures begin to take shape however there’s currently too much uncertainty for me to be able to accurately factor in future revenue generation from these ventures. The extra income CPHC will receive as a result of the future rents and leases collected from these new buildings won’t be enough to tip the scale on this DCF but the extra foot traffic it could potentially bring into the race track and the casino could be significant. Over 600 upscale apartments, a 147 unit senior center, a 19,000 person capacity amphitheater, all located on Canterbury’s grounds and 109 homes being built across the street by Pulte should prove helpful in boosting CPHC’s racetrack and casino revenues. By how much or if this could possibly outweigh CPHC’s potential exclusion from sports betting and continued exclusion from slot machines remains to be seen.

Liquidation Valuation

A theoretical liquidation valuation will help us figure out what the share price would be worth if we stripped down CPHC and sold it for its parts.

As you can see from the image above, after CPHC’s liabilities are subtracted from its assets and then divided by the total number of outstanding shares we get a share price target of $16.48. This 30.5% decrease from the current share price of $23.70 a share is the second reason I am putting a HOLD rating on CPHC. For CPHC, I would have to see the share price dip to or below this $16.48 a share threshold again before I could consider giving this stock a buy rating.

My Rating And When I Might Change It

I would HOLD this position until more news about the future of sports betting legislation in Minnesota becomes clear. I would also need to see the prospects of CPHC eventually getting slot machines in their casino improve. Before the deal for the Native tribes to increase CPHC’s purse sizes in exchange for them to stop pursuing slot machines at the Canterbury Park Casino, Minnesota did get close to approving them.

By the Native American Tribal community having a monopoly on slot machines and potentially an upcoming monopoly on sports betting in the state of Minnesota, CPHC may lose foot traffic as people embrace this new way of betting that seems to exponentially be gaining popularity. Legalized sports betting already saw a 27.5% increase from 2022 to 2023 from $86.9 billion to $119.8 billion in revenues. That’s a lot or potential money that non-Native American owned Minnesotan casinos would miss out on and could severely damage their potential to bring in new sources of revenue.

As the Covid-19 restrictions ended many gambling and hospitality businesses saw a boom in year over year revenue growth. 2021 and 2022 looked especially exceptional due to the economic impact of the 2020 shut downs severely hurting revenues coupling with a reopening that saw a population of people rich with cash and hungry for public interactions begin to walk back into public spaces once again.

CPHC saw an 82.3% increase in revenues YOY between 2020 and 2021 from $33.14 million to $60.44 million. You can see this correlation in the stock price as 2021 ended the share price of CPHC rose significantly and stayed high all through 2022 before dropping as that post Covid-19 honeymoon period faded away and as the effects of smaller purses for horse racing and the absence of the Twin Cities Summer Jam effected CPHC’s revenues. CPHC saw an 8.1% decrease in revenues from $66.82 million in 2022 to $61.44 million in 2023.

The stock price has since recovered but CPHC’s ability to continue to grow their casino revenue in order to support and replace the revenue lost from its horse races is dependent on matters that are unfortunately, largely in the hands of the Minnesotan legislature.

Conclusion

Since we seem to be caught in a moment of uncertainty around what will happen with sports betting and if slot machines will ever be available at Canterbury’s casino I am placing a HOLD rating on CPHC for the time being.

If sports betting and or slot machines were to become available at CPHC’s casino then a buy rating at the stock’s current price might be warranted but until then the stock price looks to be overvalued. CPHC’s share price has made volatile changes before and it is possible that if any kind of bad news comes into the picture a buying opportunity may present itself. I do believe that if legislation that excluded CPHC from sports betting were to pass then CPHC’s stock price might drop enough to warrant a buy rating based off of a liquidation assessment. A significant price dip might then leave some room for some share price increases based off of the company’s real estate ventures and foot traffic brought in from these real estate developments. If or until this happens however, I will myself not be buying into CPHC.