Though the motor racing downturn has lingered, International Speedway shares have enough room for another run, write Warren Miller and Paul Larson of Morningstar StockInvestor.
International Speedway (Nasdaq: ISCA) is the leading promoter of motorsports entertainment in the US. The company owns or operates 13 race tracks, including the well-known Daytona International Speedway and Talladega Superspeedway.
International Speedway’s marquee event, the Daytona 500, will take place Sunday. It has been a very painful couple years for a company dependent on consumer discretionary spending, and we are hopeful a rebound is around the turn. With a majority of its costs fixed, recapturing lost revenue would result in rapid profit growth.
The France family controls more than 66% of the voting rights and also maintains control of NASCAR, the motorsports governing body that accounts for most of International Speedway’s revenue.
NASCAR, like most sports, has strong traditions. Fans and drivers are accustomed to having certain races at certain tracks on certain dates, and any change would probably result in significant backlash. This provides a reliable revenue stream for International Speedway. Because fans’ loyalty to tracks is so strong, it would be extremely difficult for any competitor to enter a region with an existing track and displace its races—just as it would be difficult for the Cubs to move out of Wrigley Field.
International Speedway has forged the path of motorsports evolution since its inception. Daytona is the most recognizable track in NASCAR. The Daytona and Talladega tracks together seat more than 300,000 fans, not including the infield, and rarely fail to sell out. Fan loyalty to drivers, cars, and tracks creates huge opportunities for companies seeking to spend marketing dollars via sponsorship. International Speedway is a direct and indirect beneficiary of these sponsorship dollars.
Desperately Seeking Circuses
While premier NASCAR events are a big part of International Speedway’s competitive advantage, they will provide little of the company’s future growth. The most prestigious races are almost always sold out, and the racing schedule is packed. However, the less prestigious race series have room for popularity growth, and the company has begun using its tracks for non-motorsports events such as concerts. The challenge for International Speedway will be to get people to attend these various events and to utilize its tracks—which currently sit dormant for much of the year—as much as possible.
NASCAR’s long-term contracts with major networks, radio stations, and publications help to solidify International Speedway’s market-leading position. The most notable of these is the eight-year TV deal signed in late 2005 that guarantees a certain percentage of revenue for networks, winning driving teams, and hosting racetracks.
Our fair value estimate for International Speedway is $38 per share. [The stock traded a bit above $29 Tuesday--Editor.]
We believe the company can only grow revenue by 2% over the next five years because we now expect the downturn in demand for motorsports entertainment to be more prolonged than the downturn in the general economy.
TV Revenue in Jeopardy
In addition, we expect International Speedway to lose 10% of its media rights revenue in 2014 when it will face tougher bargaining conditions as a result of declining television viewership. Because International Speedway has significant fixed costs, these changes to our revenue assumptions are not offset with commensurate decline in variable costs and therefore have a larger effect on operating margins and free cash flow. We now expect International Speedway will have 21% operating margins in five years, identical to its current operating margin and significantly lower than the 28% average operating margins it’s had over the last five years.
