Is track operator Magna Entertainment a good bet?

Posted Jun 22nd 2007 7:30PM by Zac Bissonnette
Filed under: Columns

When Magna Entertainment (NASDAQ: MECA) announced the departure of CEO Michael Neuman today, the market responded by slashing the shares by more than 10%. The press release was terse:

AURORA, ON, June 22 /PRNewswire-FirstCall/ - Magna Entertainment Corp. ("MEC") (NASDAQ: MECA; TSX: MEC.A) announced today that Michael Neuman, its Chief Executive Officer, will be leaving the company effective immediately to pursue other opportunities. Frank Stronach, MEC's Chairman, will assume the position of Interim Chief Executive Officer and stated: "Michael worked very hard during his time at MEC and we wish him well in his future endeavors." Mr. Neuman stated: "I wish my colleagues at MEC well going forward and hope that the company will be successful in implementing its long-term plans."

Mr. Stronach also noted that "MEC remains focused on implementing the strategic initiatives described at our recent annual meeting, including the sale of non-core assets to further reduce debt."

One of Jim Cramer's rules for investing is that you should never buy, and should usually sell, a stock on news of a top executive's unexpected departure. Neuman left "to pursue other opportunities". The implication seems to be that being CEO of Magna is not that great of an opportunity. And who can blame him? The shares have shed more than half their value since the beginning of 2006, and Neuman only joined the company in February of that year.

There appears to be a fair amount of turmoil and uncertainty surrounding this company but with that, some investors may find opportunity. According to the company's website, Magna is "North America's number one owner and operator of horse racetracks, based on revenues, and one of the world's leading suppliers, via simulcasting, of live racing content to the growing inter-track, off-track and account wagering markets." The company operates 8 thoroughbred racing tracks, and also operates off-track betting facilities as well as HorseRacingTV. So far though, Magna has been unable to turn its strong properties into earnings for shareholders, and the stock has lagged accordingly.

But the value may lie in the balance sheet. At the end of the most recent quarter, the company had a book value of $437 million, $327 million of which consisted of tangible assets. The company recently announced the sale of San Luis Rey Downs for nearly 4 times its carrying value of $6.2 million. If Magna has other similarly undervalued assets, this could be a prime takeover target for a company like Churchill Downs (NASDAQ: CHDN) or perhaps a private equity firm.

In the meantime, the lack of profitability and shake-up at headquarters give the shares a fair amount of uncertainty, but may pose an opportunity for patient, aggressive investors.

Tags: Magna Entertainment, MagnaEntertainment, MECA