Slots Slow at Dover Downs

Shares of Dover Downs ( DDE) fell 9% Wednesday after the Delaware State Lottery Office said slot proceeds at the company's race track dropped during the second quarter.

As a result, the company could be in danger of missing analysts' revenue estimates when it reports results later this month.

The Delaware State Lottery Office said net video lottery proceeds at Dover Downs totaled $51.6 million in the second quarter, down from $55.4 million in the first quarter. The numbers likely spooked investors since Wall Street had expected Dover Downs -- which receives the bulk of its revenue from the lottery (slots) -- to post roughly flat second-quarter revenue.

Analysts, on average, project total second-quarter revenue of $59.2 million, compared with $59.3 million in the first quarter.

The drop was a victory for short-sellers who have been increasingly betting that the stock is poised for a fall, after showing a strong momentum swing to the upside in recent months. Last month, the stock had an 81% increase in short interest.

The shares have jumped from $17 to $20 in recent months on no news, except for a stock split. On Wednesday, the stock fell 8.8% to $18.35.

"Dover Downs, although a well-run company, seems fairly pricey to us for a basic Delaware operation," says Steven Gart, a senior investment analyst with Nickel Capital, a hedge fund that has a short position in the stock.

According to Gart's model, the company trades at approximately 10.5 times 2007 earnings before interest, taxes, depreciation and amortization. This ranks the company just behind Las Vegas Sands ( LVS)and Wynn ( WYNN) as the most expensive gaming stocks on comparable enterprise value-to-2007-EBITDA ratios.

But whereas Las Vegas Sands and Wynn have substantial growth opportunities in Macau, Dover Downs owns just one race track operation in Delaware.

Dover Downs couldn't be reached for comment.

"On a fundamental basis, Dover's price multiple doesn't seem to make sense when the average small-cap operator trades at or around eight times 2007 EBITDA," Gart says. "The 30% premium seems like an unwarranted valuation anomaly especially given new competition coming online in Pennsylvania from the likes of Harrah's ( HET)."

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