Value Interrogator's  Instablog

Closing Price as of 08/13/2009: $27.88

12-24 month Target Price: $53

Summary: 

International Speedway Corp. (ISCA) is a very strong intermediate-term cyclical recovery play with potential 12-24 month price upside of 90% from 8/13/2009 levels.  This Oligopoly leader, with very manageable debt levels, a wide competitive moat, and a fan base highly responsive to brand advertising is poised to see a sharp recovery in earnings as consumer confidence is slowly restored and its loyal (sometimes fanatical) fan base returns to the race tracks. 

Business Description: 

International Speedway Corp. is the leading promoter of NASCAR motorsports events in the United States.  The company owns and/or operates 13 NASCAR race tracks including the widely known Talladega Superspeedway and Daytona International Speedway.  By hosting over 100 NASCAR racing events a year, the company generates revenue from event ticket sales and advertising sponsorships (30% of FY08 Revenue), TV and Radio broadcasting rights to the races (60%), merchandise, food, & beverage sales (10%).

Over the last 10 years, NASCAR racing has grown to become the second most popular sports related activity behind NFL football.  NASCAR fans are widely recognized as being among the most brand loyal of all sports fans which allow ISCA to attract a long list of advertising sponsors.

Investment Thesis:

ISCA has been beaten down given the severe impact the recession has had on ticket sales and overall top-line growth.  Indeed, most sell-side analysts have a “Hold” rating on the stock.  They are justifiably spooked by the impact of lower consumer spending on NASCAR.  Given that ISCA’s expenses are mainly fixed in nature, any changes in revenue flows almost completely to the bottom line.  Thus, Fiscal 2Q09 (ending May 31^st) saw operating earnings decline 33% (excluding one-time charges) to $0.35/shr compared to $0.52/shr profit in 2Q08.  This earnings decline resulted from a 13% decline in total revenues relative to 2Q08 leading to a 500 basis point contraction in operating margins to 21%. 

The key to this story is that all this is temporary.  Nervous consumers have reduced their discretionary expenses to hunker down through this “Great Recession”, as seen with ISCA’s 2Q09 year over year admissions revenue down 18%, and food & beverage revenue down 25%.  However, I believe we are seeing the worst of this, and ISCA is weathering the storm quite comfortably.  The company has a modest debt load (with no material maturities for a few years) and a strong cash war chest.  Net debt/Equity stands at a very manageable 25% and company officials have also expressed their commitment to maintaining ISCA’s ‘BBB’ credit rating.  I believe that once economic conditions improve even a little bit for main-street America, NASCAR fans will begin coming out for more races again.  The worst is behind ISCA and its long term earnings ability, as modest as actual growth may be, is still very much intact.

I would argue that ISCA will be an intermediate stage beneficiary of the economic recovery, as weak as it turns out to be.  There is only upside and very little downside for this stock.

Leading Competitive Position

The motorsports industry exhibits heavy ologopolistic characteristics with the top three track owners making up the vast majority of the industry.  ISCA, at 13 tracks, owns half of all of the motorcar racing tracks in the United States and is thus the overwhelming leading player in the NASCAR racing industry.  A distant second is Speedway Motorsports (NYSE: TRK) with seven racetracks, and Dover Motorsports (NYSE: DVD) with four tracks. 

In addition, the very high barriers to entry protect existing motorsport companies from new entrants who could drive down carefully managed admissions prices and the economic rents that come with it.  Indeed, building a new motorcar race track is expensive, highly speculative without having a race commitment, and politically difficult as ISCA itself recently experienced when trying to build a new track in Staten Island New York.

Growth:

Growth in NASCAR racing has probably reached maturity with ISCA buying up tracks and consolidating the sport over the last 10 years.  The cyclical normalization of admissions sales and related revenues notwithstanding, growth going forward is likely to come from increased utilization of existing tracks for concerts and other events.  After all, the tracks sit dormant for most of the year. 

In addition, ISCA is looking to branch out into other tangential areas of entertainment including the Hard Rock Casino at Kansas Speedway.  This 50/50 joint venture with The Cordish Company, once approved, is expected to cost a total of $390 million, and generate $80 million by 2012 in EBITDA ($40 million for ISCA). 

(Note, for valuation purposes, I do not account for any new sources of revenue, thus these new projects might hold a certain “option value” on top of ISCA’s intrinsic value from existing operations.)

Corporate Governance and Anti-Trust Issues:

The France family owns 66% of the voting shares and only 40% of the board is independent.  This fact alone does raise corporate governance questions.  Plus, the fact that the France Family controls both ISCA and the NASCAR organization raises antitrust issues as well. However, the France family founded NASCAR and has soundly demonstrated their competence and commitment to ISCA’s long term success, and anti-trust related lawsuits have thus far been unsuccessful.   This is reminiscent of Donald Trump’s unsuccessful anti-trust lawsuit years ago against the NFL.

Valuation:

I have an 18-24 month price target of 53/shr based primarily on a Price/EBITDA multiple of 8.4x 2011 EBITDA.  At $27.88/shr as of the close on August 13^th 2009, my target price of $53 implies a total holding period return of 90% or a 38% annualized return over two years.

I am assuming that 2009 is basically shot for the company earnings-wise.  I am modeling a 10% drop in consolidated revenues (toward the lower end of management’s guidance) along with heavy EBIT and EBITDA margin compression to 23% (from 30%) and 33% (from 40%) respectively. 

Starting in 2010, I am modeling a modest 5% growth in annual revenues off trough levels, and widening margins gradually increasing back to pre-recession levels by 2012.  Thus, ISCA should generate about $300 million in EBITDA by FY2011. 

At a 9yr normalized Price/EBITDA multiple of 8.44x  FY2011 EBITDA, and an Enterprise Value/EBITDA multiple of 9.8x (slightly below its 9 yr normalized average of 9.9x), I come to an intrinsic value of $53/shr.  I am assuming no share repurchases and a flat share count.

Note, I used a 9 year average multiple instead of 10 years in order to exclude 1999’s high tech-bubble multiple.

Investors should also bear in mind that this valuation does not account for any revenue and EBITDA benefits possibly realized from new growth projects such as the Hard Rock Casino at Kansas Speedway.

Disclosure:  The author does not have a position in ISCA at the time of writing.

Summary: 

As a post script to my last entry addressing pre-mature inflationary concerns, the labor department just released May’s CPI numbers showing that year over year core CPI increased by a benign 1.8% in May.  In addition, the Fed’s reading of industrial capacity utilization sank further to a record low 68.3%. 

Political pundits and inflation wary investors have been sounding the alarm of a looming explosion in inflation in the US, primarily due to the massive $1.8 trillion budget deficit for 2009, and expectations of the same for 2010.  Plus the hundreds of billions of dollars the Fed is printing to expand its balance sheet through its purchases of MBS, ABS, and  US Treasuries is also expected to contribute to a plummeting dollar and high inflation.  I believe these actions by the government are indeed inflationary, but these inflationary pressures are more than offset by other deflationary crosscurrents.  Primarily the growing slack in economic capacity as reflected in the very low levels of manufacturing capacity utilization and rapidly rising unemployment rates.  

It’s a little difficult right now for me to find attractively valued stocks relative to the horrid macro environment that the stock market seems to be ignoring.  Even though it’s still possible to find some attractively valued equities on an absolute basis, I still believe that the market is dangerously overbought right now and I would rather hold a good amount of cash.