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Company history

Speedway Motorsports (NYSE:TRK) was founded by Bruton Smith in the 1950s and became a public company in 1995. The Company owns and operates eight racetracks, which host racing series including NASCAR, IndyCar and NHRA. Speedway owns Performance Racing Network, a radio network that broadcasts NASCAR races at company-owned racetracks.

The source of moat

Racetracks owners industry is a natural monopoly, as one location within a 100 miles radius does not need more than one racetrack to hold NASCAR races. Some of the stadiums seat over 100,000 fans and the relationship with NASCAR along with International Speedway is impossible to replicate for new entries. The eight-year broadcast contract provides recurring revenue with guaranteed annual escalator (+3%). According to the 10-K, NASCAR's brand loyalty (as measured by fan usage of sponsors' products) is the highest among major US sports.

Revenue mix

Admissions (26% of 2011 revenue) include ticket sales for all Company races. 78% of admission revenue decline in 2011 vs. 2010 was due to lower ticket prices. The fan base of NASCAR is extremely sticky and Speedway has been active in initiatives to penetrate in the kids and family fan category. When I attended the AAA Texas 500 at Texas Motor Speedway last year, there were families who started following the sports for less than a year and about three-quarters of the attendees are core fans who have been attending every race for more than ten years.

Naming rights and official sponsorships designations were 13% of revenue. Sprint Cup name sponsorships have been sold out for 2012 and 50% sold out for 2013. Souvenir and merchandise were 7%. Luxury suite, track rentals for private parties and driving schools were 16% of revenue.

90% of liquidation value

Current market cap is 90% of the sum of land value of the eight racetracks and sanctioning agreements with NASCAR (fully secured intangible asset), after netting out long term debt and deferred tax liability. Liquidation value implies $19.

Track

Location

Acreage

$/ Acre

Land Value (M)

Atlanta Motor Speedway

Hampton, GA

820

60,000

49.2

Bristol Motor Speedway

Bristol, TN

670

96,000

64.3

Charlotte Motor Speedway

Concord, NC

1,310

150,000

196.5

Sonoma Raceway

Sonoma, CA

1,600

100,000

160.0

Kentucky Speedway

Sparta, KY

820

30,000

24.6

Las Vegas Motor Speedway

Las Vegas, NV

1,030

250,000

257.5

New Hampshire Motor Speedway

Loudon, NH

1,180

80,000

94.4

Texas Motor Speedway

Fort Worth, TX

1,490

200,000

298.0

1,144.5

Source: http://www.showcase.com/

Source: Wiki

Calculation of liquidation value

Category

Value

Source

Land Value

1,144,520

Intangible

394,984

Latest 10Q

Cash

111,142

Latest 10Q

Receivable

61,580

Latest 10Q

Inventory

9,739

Latest 10Q

LT debt

(536,806)

Latest 10Q

Deferred Tax

(377,482)

Latest 10Q

Net Value

807,677

TV contract overhang

The key overhang on the stock is the concern over the upcoming contract negotiations with the TV stations. NASCAR broadcast, part of the 2007-2014 broadcast agreement, was 36% of 2011 revenue. The economics of the broadcast contract is very attractive. It was renewed in 2007 to $4.5 billion, representing $560 million in gross average annual rights fees and 40% increase over the former contract annual average of $400 million. ESPN contributed 48%, FOX paid in 36% and TNT covered the balance. Drivers get 25% of the annual rights fees, racetracks owners (Speedway and International Speedway) get 65% and NASCAR takes in 10%.

The barometer, TV rating, is recovering

NASCAR's TV ratings recovered in 2011 after a three-year decline. Even though ratings dipped this year, executive from FOX have not expressed concern by saying, "I think the 18-to-34 problem we had this year was mostly driven by competitive scenarios, which change every year. I don't feel like it was reflective of a long-term problem with NASCAR itself." At the end of the day, NASCAR TV viewership is second only to NFL.

Two-year rolling fan basis, according to my conversation with ESPN in the summer, has increased 20% Y/Y in 2012. That should bode well for the ongoing contract negotiation, which is expected to be finalized by early 2013. Live sports are very valuable to the TV networks, even in today's TiVo age. Fans want to watch a NASCAR races live and there is a high chance the upcoming broadcast contract would surprise on the upside. At current price of $16, market is pricing in a flat rate for the new broadcast contract.

More efficient operation

Speedway runs a more efficient operating model relative to International Speedway through employing 30% of its staff on a part-time basis. Speedway enjoys 200bps lower direct event expense as a percentage of revenue vs. International Speedway from 2008 - 2010 even though ISCA has since caught up in 2011.

Operating margins

Calculation of degree of operating leverage

The business model of Speedway has sizeable operating leverage. Fixed cost is approximately 40% of revenue in NASCAR prize money and staff payroll. Degree of operating leverage is estimated to be 0.5 using 13 year historical average excluding outliers in 2002, 2007 and 2011.

1994

1995

1996

1997

1998

1999

2000

2001

2002

Revenue

65

76

102

192

230

317

353

376

377

Operating Income

21

30

39

68

80

99

110

116

125

EBIT margin

32%

39%

39%

36%

35%

31%

31%

31%

33%

∆ EBIT/ ∆ Revenue

0.81

0.36

0.32

0.30

0.22

0.31

0.29

18.12

Revenue

2003

2004

2005

2006

2007

2008

2009

2010

2011

Operating Income

405

447

544

562

562

611

551

502

506

EBIT margin

132

148

188

209

201

212

163

121

116

∆ Revenue

33%

33%

34%

37%

36%

35%

30%

24.1%

22.9%

∆ EBIT/ ∆ Revenue

0.23

0.39

0.40

1.18

18.30

0.22

0.80

0.88

-1.40

Using excess capital to de-lever

Speedway has been a disciplined capital allocator since levering itself up to acquire New Hampshire Motor Speedway in 2007 and Kentucky Speedway in 2008. The mistake of the acquisition has been erased by making significant goodwill markdown in 2011 ($49 million). 25% of free cash flow is used for dividend payment and the rest is to pay down long term debt. Management has a stated goal to reduce long term debt by 20% to $450M by 2015. Current long-term debt stands at $537 million, according to the latest 10Q. This implies about 3x EBITDA.

DCF: No growth in admission revenue and +15% in the TV contract to get to liquidation value

Since the main value lies in 2015, a DCF is used to estimate what scenarios are needed to get to liquidation value. Admission is assumed to decline 4% and 2.5% in '12 and '13 and registers zero growth going forward. Key admission assumptions are 75% occupancy rate, $70 average ticket prices and 2.5 races per track for the out years. Event, which is primarily sponsorships and naming rights, is estimated to be steady at +2.5% Y/Y. The new broadcast contract would be revised up by 15% to a total contract value of $5.1 billion or $210 million a year for Speedway. 15% increase is reasonable considered MLB just doubled up their TV rights fee .

Top line estimate

2007

2008

2009

2010

2011

2012E

2013E

2014E

2015E

Admissions

179.8

188.0

163.1

139.1

130.2

125.0

122.0

122.0

122.0

Y/Y

2.6%

4.6%

-13.3%

-14.7%

-6.4%

-4.0%

-2.4%

0.0%

0.0%

Event

197.3

211.6

178.8

156.7

163.6

167.7

171.9

176.2

180.6

Y/Y

7.6%

7.3%

-15.5%

-12.4%

4.4%

2.5%

2.5%

2.5%

2.5%

NASCAR broadcasting

142.5

168.2

173.8

178.7

185.4

191.0

196.7

202.6

208.7

Y/Y

-12.4%

18.0%

3.4%

2.8%

3.7%

3.0%

3.0%

3.0%

3.0%

Other

42.0

43.2

34.8

27.7

26.6

32.9

25.5

25.5

25.5

Revenue

562

611

550

502

506

517

516

526

537

Risks

  • Discretionary consumer spending continue to be pressured
  • The new 2015 broadcast contract may disappoint
  • Deleveraging process might be interrupted
  • O. Bruton Smith controls the company with over 60% ownership and had issue in the past.

Bottom line

The new TV deal, which is expected to be finalized in 1H 2013, would be the near-term upside catalyst. Quick liquidation value of $19 implies zero admission growth and a modest +15% bump in the new TV contract. Add the roughly 15% upside to the 3.6% dividend yield gives an expected annual return from today's share price pushing 20%.

Disclosure: I am long TRK. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.