Save for a glimmer of optimism about a year ago, I've been consistently bearish on International Speedway (NASDAQ:ISCA) based on a very simple thesis: there is little chance for upside from a $30+ share price without some sort of growth in admissions revenue. To be sure, NASCAR's 10-year TV deal, which runs through 2024 and provides the bulk of ISCA revenue, provides significant support to ISCA shares. But beyond those contractually-fixed revenues, ISC needs to drive some sort of rebound in attendance to support any real upside.
But the company simply hasn't been able to do so; admissions revenues admittedly have stabilized (despite lower attendance) over the past few years, but they seem likely to be ~flat again (at best) in FY16. A 3%+ gain in the first nine months, per the Q3 earnings release, seems likely to be offset in the busier fiscal Q4 (ISC fiscal years end in November): ISC president John Saunders said on the Q3 conference call that the three races already held in Q4 had seen admissions revenue declines, with an average 10% decrease in advance sales for the five remaining Sprint Cup events this year. The flattish results come despite ISC's $400 million investment at Daytona, which has allowed for price hikes this year that have partially camouflaged weakness elsewhere in the portfolio.
Attendance aside, there's still an argument that given the asset base here, and the eight years remaining on the lucrative TV deal, ISCA is worth a flyer near $30. Flat admissions revenue remains a relatively marginal problem for ISC, one that can be offset by the annual increases in broadcasting revenue. What appears to be declining interest in NASCAR raises out-year concerns relative to valuation, but those out years still are eight-plus years away, and even in a worst-case scenario, certainly there is some level of inherent value to the thousands of acres owned by ISCA.
What concerns me coming out of Q3, however, is that there seems to be another problem: management. That's not to say ISC necessarily is poorly managed; in fact, I don't believe that's the case. ISC's attendance actually has held up better than rival Speedway Motorsports (NYSE:TRK), as ISC clearly has been more aggressive in pushing advance ticket sales to mitigate weather impacts. And it's not as if ISC management is responsible for what looks like overall declining interest in NASCAR, or the other factors that seem to be pressuring attendance.
But I'm not sure management strategies necessarily are pointed purely toward shareholder value, which might see an odd contention for a majority- and family-owned company. The controlling France family, including CEO Lesa France Kennedy, also owns NASCAR itself, and there are times when it appears the family is more interested in the sport than the business. That in some respects is a noble attitude - but it's not one that does much for ISCA minority shareholders.
ISC already invested $400 million in Daytona for what the company said was incremental EBITDA of just $15 million. That seems a huge investment (nearly 30% of the current market cap) and hardly accretive, given that at Thursday's close of $30.35, ISCA trades at a 6.7x EV/EBITDA multiple. There perhaps is an argument that improving the company's - and the sport's - flagship property has a 'halo effect' elsewhere, but purely from a shareholder perspective there seems to be better ways to drive value.
From that standpoint, the company's five-year plan disclosed in the Q3 release, and discussed on the Q3 call, looks more concerning than it might otherwise. ISC is planning to spend $500 million in capex from 2017 to 2021, with the first major portion dedicated to an extensive renovation of Phoenix International Raceway. That's in addition to $95 million in spend for ONE DAYTONA, a development around the Daytona property, which is guided to add ~$9 million in EBITDA (a similarly non-accretive 10x+ multiple).
The problem is that the spend isn't expected to boost earnings; retiring CFO Dan Houser projected on the Q3 call that the spend would offer a low- to mid-single-digit return, below ISC's WACC. Part of the issue here is Phoenix, which appears to need a massive infusion of maintenance capex, with Richmond likely next on the list.
But it's worth asking - and, indeed, an analyst did so on the Q3 call - whether this spend is necessary, or wise, for what certainly looks like a declining business. Houser replied essentially that ISC is a capital-intensive business which requires maintenance capex that doesn't necessarily hit ROIC targets. But later in the call, Saunders answered an analyst question about the long-term plan by saying ISC still expects long-term growth in admissions revenue (though he didn't specifically mention attendance, as the questioner did). Saunders cited seating that has been pulled out of several ISC tracks (Speedway Motorsports and Dover Motorsports (NYSE:DVD) have done the same) as better matching supply and demand, and mentioned getting "casual fans" and implementing "millennial strategies" as additional drivers. But on the Q2 conference call, Saunders said better racing would help; yet NASCAR from that standpoint has had a good season, the Chase looks competitive, and back-half attendance ex-Daytona has been extremely weak.
From a strategic standpoint, then, there may now be two issues. The first is that ISC management and ownership are focused on NASCAR as a whole, not simply ISCA's share price. Again, I don't necessarily believe that to be a bad thing - though it might be an argument against becoming a minority shareholder in the company. The second might be that despite what has been a nearly decade-long decline in attendance - to the point that NASCAR stopped releasing crowd sizes four years ago - ISC still is planning for a turnaround that simply may not come. Certainly, management doesn't have an answer for driving growth - and given the relatively weak star power in the sport and an aging demographic, the worry has to be that there may not be an answer.
Between the two Daytona projects and the five-year plan, ISC is spending close to a billion dollars; its market cap at Thursday's close of $30.35 is $1.42 billion. The France family still controls ~40% of the economic ownership of the stock (and a majority of the voting power), so some sort of major capital allocation move (like a substantial tender offer) likely would be awkward, if not impossible (assuming ISC doesn't want to shrink its float). But the same five-year plan implies just ~$280 million in shareholder returns between dividends and share repurchases.
I've written in the past that $30 looked like a possibly intriguing price for ISCA, given the free cash flow capabilities and the locked-in revenue through 2024. But coming out of Q3, I'm no longer sure that's the case. I'm concerned about strategy, and fundamentally the capex plan implies a higher run-rate of maintenance capex than I had modeled in the past. Part of the argument for ISCA in 2014-2015 was that its P/E - which generally sat in the low- to mid-20s despite almost comically flat EPS - obscured a rather low, near-zero-growth, normalized free cash flow multiple.
But given that a substantial amount of the $100 million annual capex going forward appears to be maintenance-based, and given that ISCA seems likely to use capital to invest in the business when shareholders might prefer that capital to be returned, I'm not sure that's the case anymore. And given that the $100 million run rate actually is higher than D&A, EPS and FCF should track more closely - and that makes ISCA look potentially overvalued even near an 18-month low. In the Q3 release, ISCA pointed to the low end of guidance for $1.45-1.55, which still implies a 20x+ multiple to FY16 EPS. ISCA has driven no EPS growth over the past six years (FY10 EPS was $1.52 on a higher share count), not even with the contribution from higher broadcasting revenue in FY15 and FY16. ONE DAYTONA should contribute ~$0.13 in EPS next year, and the contracted 3-4% increase in media revenue should add another $0.10. But flat admissions and higher SG&A have offset those benefits in the last two years and if NASCAR interest doesn't at least stabilize, that could happen again in FY17.
Meanwhile, the valuation question over the past year-plus has been whether ISCA's price should include a substantial decline in terminal value, assuming that profits fall substantially once the TV deal (which certainly appears to have been negotiated at a peak for sports rights) is up. The longer attendance and ratings, which have been awful this year, decline the more true that seems.
All told, there's a reasonable argument for a mid-$20s valuation for ISCA, which is a substantial step down from where I'd previously modeled downside even with a relatively bearish attitude toward the stock. There's also the practical concern as to whether equity holders can expect more than ~4% returns through dividends and buybacks, while capital is expended on questionable projects in a bid to fight the overall decline. It certainly seems like the story at ISCA has changed over the past two quarters, with analysts more aggressively questioning the overall strategy, TV ratings moving further south and patience perhaps running thin with the admissions declines. I don't think there's quite enough for a short - though a return to the mid-$30s might change my mind, as I think $40 is exceedingly difficult to model in the near term. But the concerns are mounting for ISCA, and it's difficult to see a reversal on the way.
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