International Speedway Corporation is a leading promoter of motorsports activities, currently promoting more than 100 racing events annually as well as numerous other motorsports-related activities. The company owns or operates 13 race tracks in the U.S. including the famed Daytona and Talladega Superspeedway race tracks. The company generates revenue form the admissions, broadcasting, advertising, food and merchandise sales at the 100 or more races it organizes every year
The company also owns and operates MRN(R) Radio, the nation's largest independent sports radio network and Americrown Service Corporation(SM), a subsidiary that provides catering services, food and beverage concessions, and produces and markets motorsports-related merchandise.
Business and Industry TrendsIn 2010 the company generated 65% of its revenue from television and related media revenue, and 33% of revenue from ticket and concession sales. The company is currently in the process of building a casino at its Kansas Speedway in a joint venture with Penn National Gaming.
Softening economy continues to impact attendance-related revenue but there are positive signs of stabilization in ISCA’s business.
Revenue is expected to be approximately $630 million in fiscal 2011, still down approximately23% vs. the peak revenue achieved in fiscal 202007, but the trend of declining revenues is stabilizing with fiscal 2011 revenue expected to be down only approximately2% vs. fiscal 2010, much better than the 12% and 7% decline suffered in fiscal 2009 and fiscal 2010.
Advanced ticket sales for the Sprint Cup events are up approximately 1% in units. Weighted average ticket price through August for Sprint Cup event is comparable to 2010. Per-cap spending for customers is steady. Capacity utilization for Sprint Cup through August event was approximately 84% up from 76% last year.
Level of corporate marketing activity is stable with agreements in place for 97% of gross marketing partnership revenue target for fiscal 2011, which is consistent with last year.
Television viewership has also improved. For the first 26 Sprint Cup Series telecast this season, viewership is up approximately 9% over 2010. This is comparable to viewership NASCAR enjoyed in 2009, importantly the 18 to 34-year-old male viewership is up 23% from last season. On average, per event, for the most recently completed regular season, NASCAR had the second-largest number of viewers
Management plans to further exploit NASCAR digital rights to full extent given the most recent sports media rights agreement of NFL and PGA in reference to the proliferation of digital content on tablets and hand held devices
Management is also focused on investing in stadiums to enhance the live event experience for its guests for future growth. Today's consumer wants easy access in and out of a venue, comfortable and wider seating, clean and available facilities, enhanced audio and visual engagement, and social connectivity. Management believes that by delivering memorable guest experiences along with attractive pricing and fantastic racing, ISC, in time, will generate stronger attendance-related revenues as well as bottom-line results
In addition, management of both ISC and NASCAR have made public their desire to have presence in areas it sees as having the potential for high growth, most notably the Pacific Northwest and New York City. ISC has said that the earliest either of these tracks would be operating is 2011.
While investing in future growth, management will continue to keep strong focus on controlling the costs to deliver stronger operating margins.
Economic uncertainty and high unemployment remains the biggest impediment to consumer confidence which directly impacts ISCA’s business (given that it is considered discretionary spending). But economy and unemployment is expected to improve as housing comes back, which will directly impact the attendance numbers for the races. Corporations are in best shape ever from financial perspective and any improvement in housing and unemployment will also provide a tailwind from the corporate advertising spend perspective. When the economy strengthens ISCA has tremendous opportunity to prosper through improved consumer and corporate spending trends.
MoatInternational Speedway has wide moat as the motorsports stadium industry is a natural monopoly at the local level, as one geographic market does not require more than one racetrack to hold NASCAR events. ISCA also has an advantage in terms of being allotted the most preferable NASCAR races and dates given that the France family (which owns NASCAR) also controls majority shareholding in ISCA. NASCAR also has an eight-year contract with multiple TV channels which provide for guaranteed broadcasting revenues to ISCA ensuring financial strength, earnings and cash flows.
In addition, ISCA has contracted revenues from sponsorships as well which stabilize its financial resilience and profitability during difficult economic conditions. NASCAR events also have huge fan followings and very high customer loyalty — race fans are very loyal to the sport and they show it by the clothes they wear, the flags on their trucks, etc. As per ISCA’s annual report, NASCAR races are one of the top rated sporting events in U.S. and draw larger crowds than a Super Bowl, a NBA Finals game, and a World Series game combined. No wonder almost every Fortune 500 company wants to be a sponsor of the NASCAR event. NASCAR’s brand loyalty (as measured by fan usage of sponsors’ products) is the highest of any nationally televised major league sport, and NASCAR fans are believed to be three times as likely to purchase NASCAR sponsors’ products and services than non-fans.
Competition ISCA’s competition for attendance is quite minimal as motorsports stadium behave as a natural monopoly at the local level, as one geographic market does not require more than one racetrack to hold NASCAR events.
But ISCA primarily competes with Speedway motorsports (TRK) and Dover motorsports (DVD) for NASCAR sanctioned race allotments and corporate sponsorships. This is where competitive advantage lies for ISCA given that it is owned by France family who owns the NASCAR and is responsible for allotment of races, dates, and sharing of revenue from long term broadcasting contracts with primary channels as well as sponsorships from corporations
ISCA competes for spectator interest with all forms of professional and amateur spring, summer and fall sports, and with a wide range of other available entertainment and recreational activities, conducted in and near the regions where its race tracks are located.
ManagementThe France family owns NASCAR as well has 70% voting control in the International Speedway (ISCA). This ensures that ISCA gets preferential treatment when it comes to allotment of NASCAR races. ISCA owns two of the most famous Sprint Cup racing tracks (Daytona and Talladega). ISC presently hosts a significant number of Sprint Cup and Nationwide Series races
The France family owns approximately38% of the capital stock which is a very high level of insider ownership ensuring that shareholder interests are aligned with the management of the company (three members of the France family are among the board of directors).
Management has been utilizing its cash flow to buy back shares when they are cheap. The board of directors has authorized the repurchased of an incremental $80 million of the company stock in addition to $250 million of existing stock purchase plan (which they have 90% or more executed as of Oct. 7, 2011).
In the environment where the economy is so uncertain and the consumer is watching every dollar it spends, revenues are bound to go down but management is strictly focused on managing cost and ensuring that operating margins are improving even in this stable or declining revenue environment.
Above efforts ensure that management is shareholder friendly and taking steps to provide more value to its shareholders in the form of share buybacks and increasing dividends.
ValuationThe stock traded at $21.93 on Nov. 25, 2011, just 9% above its 52-week low of $20.08. The current price seems to reflect all the bad news related to the uncertain economy and high unemployment which is directly impacting the attendance levels at the ISCA’s NASCAR race events. Any improvement in unemployment and encouraging signs of the U.S. economy improving will act as a tailwind to the stock performance of ISCA and push its price towards its intrinsic value which I estimate to be between $26 and $29.
ISCA’s tangible book value at the end of fiscal 2010 (end of November 2010) was $17.50 and it earned $1.13 per share in fiscal 2010. Applying a very conservative P/E of 10 (historically ISCA has traded between P/E of 16 and 25) to fiscal 2010 EPS will provide the earning driven value of ISCA to be approximately $11.3. Adding tangible book value to earnings-driven value will provide us with an approximate intrinsic value of $29, giving us 32.2% margin of safety when compared to the current market price, a good margin of safety for a high moat business.
Assuming revenue will remain flat in fiscal 2011 and fiscal 2012 and grow 1% in fiscal 2013, 2% in fiscal 2014, and 5% in fiscal 2015 and fiscal 2016 will provide us projected revenue from fiscal 2012 to fiscal 2016. ISCA on average has converted approximately 28% to 30% of its revenue into operating cash flow and on average 50% of its operating cash flow into free cash flow. Applying these ratios to revenue and operating cash flow numbers will provide us with projected free cash flow from fiscal 2012 to fiscal 2016. FCF is assumed to grow at a terminal rate of 2.5% (less than the long-term inflation rate of 3%) beyond fiscal 2016 for the rest of the cash flows. Discounting these FCF at 9% discount rate (given that the five-year Treasury bond runs a coupon rate of 1% plus a U.S. equity risk premium of 5% and inflation rate of 3%) will provide us with intrinsic value of $28.80, providing us with 31% margin of safety.
Applying Graham’s intrinsic value calculation, fiscal 2011 EPS are expected to be $1.60. Applying the 10-year average growth rate of 4% will get us the intrinsic value of 1.60*(8.5+2*4) = $26.4, again a margin of safety of approximately 20% for a very high-moat business.
Historically ISCA’s stock has traded at an average P/E of 20 (average 2001 – 2011). Applying the 10-ear average P/E to fiscal 2011 earnings of $1.60 provides approximate value of $32 providing us with 46% margin of safety. If a conservative P/E of 16 is applied that provides us with an intrinsic value of approximately $25.6. On a historical P/BV basis, ISCA has traded at an average P/BV ratio of 2.07, even if we apply a conservative P/BV ratio of 1.5 it will provide us with an approximate value of $28, providing us with 28% upside opportunity excluding small dividend yield which ISCA provides.
Clearly, based on multiple models, I have highlighted above ISCA is undervalued and provides us with great opportunity to buy this wide-moat business for cheap.
Financial SoundnessISCA is a sound company with $80 million in cash and a manageable debt to equity ratio of 26%. As per Morningstar, debt to equity ratio has gone down from 39% in 2001 to 26% in 2010. The quick ratio stands at 1.48, ensuring that ISCA is very comfortable in covering its immediate financial obligations.
ISCA at its peak has generated a strong operating margin of 35%. This operating margin has come down to 20% in most recent years, specifically after 2007 when the recession started impacting its revenue. Less revenue generation but a higher component of fixed cost led to a decrease in operating margins. But a 20% operating margin in this down economy is still very good and has the potential to reach its peak again when the economy improves and revenue is on a growth path again.
ISCA also generated ROIC of approximately 12% in 2008. Since then its ROIC has declined to 4.4%, again because of the declining economy and its direct impact on its revenue and profitability. But potential exists for it to achieve similar ROIC when the economy improves and people start spending (of which there are some signs of improvement.
RisksThough ISCA is a wide-moat business there are certain risks associated with its business.
1. Business is very sensitive to consumer sentiment and consumer discretionary spending, so is prone to declining revenues and attendance levels in uncertain economic times such as today.
2. Though the U.S. economy is improving, uncertainty in the euro zone can push the U.S. economy into a double-dip recession, severely impacting the growth expected in ISCA's revenue and profits.
3. Anti-trust lawsuits alleging that the France family gives preferential treatment to ISCA — though most of the cases has been resolved — will always remain a risk.
4. Bad weather can also severely impact the racing events and thus the revenue and profitability. This risk is very diversified though due to presence of racing tracks in various markets.
Disclosure: This my personal opinion on the stock and not a recommendation to buy or sell. I currently do not own any shares in ISCA.