OFF TO THE RACES By John Rubino

Horse racing has pulled up lame lately. Once a top attraction, the "sport of kings" is now an also-ran. Racetracks face stiff competition from slicker games like basketball, and they can't seem to shake their image as haunts for cigar-chomping old men in plaid sport coats. Tracks are closing around the country, and the few that have opened have barely made it out of the gate financially. In Virginia, despite a tradition of horse breeding and racing going back to Colonial times, it's been decades since anyone could legally plop down $2 on a long shot.

But that changed on Sept. 1 with the opening of Colonial Downs (CDWN, $9) on 345 rolling acres in New Kent County. The people running this track think they can revive the sport hereabouts and, just maybe, in the rest of the country. Their strategy -- call it learning from what killed the other guys -- includes the following:

• Big track, small clubhouse. Colonial Downs features two tracks that are among the longest in the country. But its clubhouse is relatively small, so its construction costs were significantly lower than other tracks.
• High equity, low debt. Instead of saddling itself with hefty interest expense, Colonial Downs took the project public, raising about $42 million in an initial offering. When complete the facility will have less than $20 million in debt vs. $60 million in capital. So a slow start won't kill it, and track management will have time to hit its stride.
• Parlors first, track second. Colonial Downs' first two betting parlors have been up and running in Richmond and Chesapeake for nearly a year. Attendance is averaging 785 a day, with total wagering at $162,000 per day. According to Colonial Downs President O. James Peterson III, the centers are earning about $100,000 a month before taxes, most of which will go toward fatter purses at the track. (Bigger purses attract better horses.)
• Seasonal racing, year-round facility. The infield and surrounding land are designed to accommodate concerts and polo games. And even when the horses aren't running, the clubhouse will serve as a big, plush off-track betting center.
• Neighborly approach, national exposure. Virginia and Maryland have cut a deal in which one state's tracks will close while the other's are open. That gives each state access to the best horses and riders for part of the year. And Colonial Downs will be able to employ many of Maryland's best track maintenance people, solving what might have been a real problem of where to find the talent to run the facility. The result, Colonial Downs officials say, will be a NASCAR-like circuit where the best horses travel from track to track, generating a following, which raises purses, which attracts better horses, which in turn generates an even bigger following, until regular folks once again know the names of the Triple Crown contenders. By cooperating, says Peterson, Virginia and Maryland "can each make more money than we could by going head to head."
• New endeavor, old hand. For Colonial Downs to succeed, several groups have to be kept happy, including horse owners, the betting public and state legislators. The point man for much of this is Peterson, who was formerly chief financial officer of the Maryland Jockey Club, which owns Pimlico and Laurel racetracks, Colonial Downs' partners in the Virginia-Maryland circuit. Before that Peterson was chief financial officer of Dominion Resources. So he's in with the local racing and financial communities -- and, presumably, the legislature.

Will Colonial Downs succeed where so many others have failed? The early signs are encouraging. While the track still lacks the finishing touches, all but one of its 10 corporate suites -- racing's equivalent of sky boxes -- have been sold at $50,000 a year. Opening day drew more than 13,000 people, and between the track and its two satellite betting facilities, over $1 million was wagered.

Going forward, the company is licensed to open four more off-track betting parlors around the state. If these centers -- which are a major source of profit for the track's operators -- avoid the nasty side effects of other forms of gambling, there's a good chance the legislature will allow Colonial Downs to open more. Meanwhile, the track is spurring other development on surrounding acreage. An 18-hole golf course opened there last year, a resort is on the drawing board and a lot of houses are going up.

All in all, it's a promising package, says Mike Beall, a Davenport & Co. analyst: "The odds are good [that Colonial Downs] will be a very profitable company." He estimates that the company will earn $1 per share in 1999, giving it a price-to-earnings ratio of about 9 based on the current price. Buy it at $8 or below, he counsels, and expect it to rise by 40 percent or so in the coming year.

John Rubino, a free-lancer who specializes in public companies, is writing a book about investing in local stocks.