In the November edition of Value Investor Insight, International Value Advisers' Charles de Vaulx, Charles de Lardemelle and Michael Malafronte explained why they believe International Speedway (ISPA) is mispriced. Key excerpts follow:
Apart from cyclicality, what tends to make the stocks you buy attractively priced?
Charles de Lardemelle: Our favorite situations are when we believe the market has fundamentally misunderstood a company or its business. That can happen for a variety of reasons. It may be that the company is relatively unique and the market hasn’t figured out how to value it. We believe that’s the case with International Speedway [ISCA], which owns and operates many of the venues that host NASCAR races. Its assets to us have the characteristics of prime real estate, in which huge cash outlays are required to create irreplaceable, one-of-a-kind franchises. Nobody looks at it that way today, but in our calculation of intrinsic value for the company we apply the same kinds of multiples you’d see on prime real estate.Describe the broader investment case for International Speedway, which you mentioned earlier.
Michael Malafronte: The company operates a dozen major racetracks around the U.S., whose primary events are sanctioned by NASCAR, the car-racing licensing body. International Speedway’s revenues come from ticket sales, concessions, on-site sponsorships and – the biggest share – from a pro-rata share of overall NASCAR TV-rights proceeds. France family – which owns NASCAR – brought International Speedway public in the mid-1990s and used the proceeds to start consolidating the track infrastructure in the U.S. They felt that gave them the best opportunity to more fully control the NASCAR franchise and it worked beautifully as the popularity of car racing exploded earlier this decade. It became the second-most watched sport on TV (after the NFL) and International Speedway shares became kind of a favorite among growth investors.
Some of the air originally started to go out of the story in 2005 when NASCAR signed a new TV contract. The previous contract had had such large annual escalators that the new contract actually paid out a lower amount in the first few years. At the same time, the business was clearly maturing. There were few tracks left to buy and de novo expansion plans into the few untapped markets left – namely the New York metropolitan area and Seattle – ran into political roadblocks.
Now the big worry is slowing race attendance. People on average drive six hours to attend a race, so high gasoline prices impacted crowds starting earlier this year. Now the bad economy will clearly have an impact on both attendance and the ability to raise ticket prices. Average prices are in the $80-90 range, and given that people often make a long-weekend trip around a race, the total outlay is quite a bit higher.
That helps explain the collapse in the share price, from above $40 in September to a recent $23.40. Why do you think the market’s pessimism is overdone?
Charles de Vaulx: One thing we like about the business is that while the model is originally capital-intensive – they need to build or buy the tracks – there’s very little maintenance capital spending beyond that. In something like a railroad, maintenance capex over time dwarfs stated depreciation, because they constantly have to replace tracks and railroad cars. That’s not at all an issue with International Speedway.
We also like that there are a finite number of weekends in the year and a finite number of tracks that could and should be built around the country. NASCAR already runs 39 weeks of the year and it’s unlikely they’ll go much beyond 41 or 42. At the same time, building a new track is expensive, politically difficult, and highly speculative without having a race commitment. A new track was recently built in Kentucky with an 80,000-seat capacity – costing something like $90 million – and they don’t yet have a big-time race. All of this creates some fairly high barriers to entry.
CDL: For us the key metric will not be attendance this year and next year, but instead the level of TV viewership. That measures the health of the business, and it’s holding up well at about six million viewers per weekend. Our feeling is that this is a television franchise that took 40 years to build and it’s not one that will be easily diminished.
How are you looking at valuation?
CDL: In our worst-case scenario, we can fairly easily estimate the TV-rights revenues that are fixed by NASCAR’s contract for another five years. We also assume admissions and concessions fall 20%. If that happens, we estimate EBIT would fall to $170 million, vs. a good year like 2006 when it was above $280 million. Leverage is not a problem: Given assets they have on the balance sheet that could be monetized, including land they bought on Staten Island for a failed race-track bid, they have no net debt. Using a conservative 10x EBIT multiple, our worst case comes to a $32 stock price, significantly above today’s price.
Under normal economic circumstances two to three years out, we expect EBIT of around $250 million. Given the characteristics of the business – growing at GDP-plus, with low capex, irreplaceable assets and barriers to entry – we think a reasonable EBIT multiple is 13x. At that level, the stock would be worth more than $60.
Has the company made any efforts to redirect more cash to shareholders?
CDL: The dividend yield is puny and could certainly be increased. The family management has been smart not to buy back stock so far, but we do expect buy-backs to pick up considerably. That’s wonderful news as long as they pay far below our estimate of intrinsic value.