John Rogers of Ariel Investments Comments on International Speedway Corp
International Speedway Corp. (NASDAQ:ISCA) is the dominant motorsports entertainment company, operating 13 of the nation's best known racetracks, such as Daytona International Speedway and Talladega Superspeedway. The company's tracks feature more than 1 million grandstand seats and 530 premium suites, hosting millions of racing fans and more than one thousand events every year. Of the 36 races in NASCAR's premier Sprint Cup Series, 21 are run on International Speedway's tracks, including the Super Bowl of stock car racing, the Daytona 500. Founded in 1953 by Bill France, International Speedway is still controlled by the France family, who also owns NASCAR. This relationship ensures that the sanctioning body is working to strengthen the sport and the racetracks, so that the fans – and investors – win.
A Devoted Fan Base
Stock car racing has hit a rough patch over the last seven years, as persistent unemployment and high gas prices have taken their toll on attendance. Since many fans travel hundreds of miles to attend a race, and spend a lot of money to see their favorite drivers on the track, economic weakness directly impacts attendance. Once the economy recovers, we believe fans will return to the stands. Compounding the economic challenges, NASCAR made several missteps just before the recession as it sought to improve safety following the 2001 death of legendary driver Dale Earnhardt, Sr. In response to declining attendance and weak ratings, NASCAR has since reversed several earlier decisions and acknowledged that they had inadvertently taken some excitement out of the races. In spite of these challenges, NASCAR remains the second-most watched sport in the country, with a highly devoted fan base.
Ready for Primetime
Investors are currently focused on the prospects for NASCAR's next broadcast contract, which represents 45% of International Speedway's revenue. The last contract, which was signed in 2005, expires in 2014 and some analysts have pointed at lower ratings as a sign of negotiating weakness for NASCAR. Looking at recent broadcast deals for the NFL and many MLB teams, we believe the market for premier live sports content is stronger than ever. As digital video recorder penetration increases, media networks are focused on acquiring live content that can deliver viewers. This year's Daytona 500 – broadcast in primetime on a Monday due to rain during the originally scheduled Sunday timeslot – demonstrated that NASCAR can succeed in primetime, as the race had the secondhighest ratings of any NASCAR race in history.
Although a deal isn't expected until the end of next year, we see significant upside to current expectations.
Exploiting New Assets
Earlier this year, the Hollywood Casino at Kansas Speedway opened as a joint venture between International Speedway and Penn National Gaming. The casino, which overlooks turn 2 of the Kansas Speedway, highlights the valuable land International Speedway owns surrounding its tracks, and the added revenues that can come from exploiting these assets. Although we are not expecting another casino in the near future, the company has explored other possibilities near the Daytona International Speedway and we believe other long-term opportunities will be considered.
A Bargain Price
At current levels, we believe investors are anticipating an overly pessimistic outcome for the broadcast contract renewal, and little or no improvement in trends at NASCAR. We are confident that NASCAR's strong fan base and International Speedway's unique portfolio of tracks will prove to be a valuable combination. As of June 30, 2012, International Speedway was trading at $26.18, a 41% discount to our PMV of $44.55.