International Speedway's Earnings Jump Puzzling

| About: International Speedway (ISCA)

International Speedway Corp. (ISCA) closed up 2.9% Thursday after delivering fiscal second quarter earnings before the market opened. "International Speedway 2Q profit rises 16 percent," wrote the AP; "International Speedway revenue up 29 percent in 2Q," added the Orlando Business Journal.

Both outlets were correct; the owner of racetracks, including the legendary Daytona International Raceway, did see a rise in revenues and profits, with non-GAAP earnings per share actually doubling from the year-prior period. But, as the company itself noted, the seemingly strong results were driven mostly by the NASCAR calendar. Races at ISCA's Kansas and Phoenix tracks held in the second quarter of fiscal 2012 (quarter ending May 31st) were held in the third quarter and first quarter of fiscal 2011, respectively.

As such, comparability to the year-prior quarter was severely limited; and the rest of the news surrounding ISCA's report was not nearly as positive as the sales and profit figures would lead investors to believe. The company reiterated its full-year guidance in both the earnings release and its accompanying conference call, projecting full-year non-GAAP earnings of $1.50-$1.60 per share, with total revenue of $610-$630 million and operating margin between 20 and 21 percent. But CFO Daniel Houser said on the call that ISCA "was more comfortable at the low end of the ranges."

Why? Because the company remains rather bearish on its customer base. "Our core fan demographic, which is Middle America, still lacks confidence due to slow job and income growth. Until these trends change, we expect our consumer revenues will remain under pressure," said CEO Lesa France Kennedy in the earnings release. President John Saunders agreed, making a nearly identical statement in his opening remarks on the conference call.

The struggles are nothing new for ISCA, which has seen four consecutive years of revenue decreases and saw fiscal 2011 (November) earnings that were just over half the 2008 level. As noted above, the company has blamed the weak economy for much of the weakness; but an equal, if not more dominant, problem for the company is the waning interest in NASCAR itself. The issue has been not just attendance, but TV ratings, with some speculating that fans are turned off by the lack of crashes. Others have complained about NASCAR's abandonment of its southern roots, and the lack of personality from its drivers. The increasing focus on business by NASCAR -- an organization which has its roots in moonshine running in western North Carolina -- has resulted in its drivers becoming "corporate shills," according to many fans (and former fans). And the sport was dominated from 2006 to 2010 by Jimmie Johnson, who won five consecutive Sprint Cup championships but never garnered the popularity of drivers like Tony Stewart, Dale Earnhardt Jr., or even the hot-tempered Kyle Busch.

Stewart finally broke Johnson's streak in 2011, and Earnhardt Jr. -- the sport's most popular driver -- broke a four-year winless streak earlier this year, which may boost fan interest. The addition of former IndyCar racer and media darling Danica Patrick may also help. But it's clear that NASCAR is struggling, and it's equally clear that International Speedway faces headwinds beyond short-term economic challenges.

Given the company's bluntness about those challenges, today's nearly 3% jump is nothing but surprising. And, given ISCA's long-term revenue decline, its valuation is equally surprising. ISCA trades at over 17x the midpoint of FY12 guidance, a very high multiple given its struggles since 2007. Yes, the stock is trading just over book; its cash flow numbers have been reasonably strong; and there is potential for increased fan interest and hope for a rebound among the company's largely middle-class customer base. But that seems hardly enough to justify such a pricey valuation for a company that has struggled for the past three years, and admits that it is likely to continue to struggle going forward. Thursday's jump post-earnings was puzzling; ISCA's stock price remains just as surprising.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.