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12/15/2009 10:50 am EST
Paul Larson, editor of Morningstar StockInvestor, and analyst Warren Miller say an owner of top auto race tracks has little competition and many ways to generate cash.
International Speedway (Nasdaq: ISCA) is the leading promoter of motor sports entertainment in the United States. The company owns or operates 13 race tracks including the well-known Daytona International Speedway and Talladega Superspeedway.
These two tracks together seat more than 300,000 fans, not including the infield, and rarely fail to sell out marquee events. International Speedway hosts more than 100 racing events per year, which generate revenue from admissions; broadcasting rights to the races; the sale of food, beverages, and merchandise, and advertising sponsorships. Fan loyalty to drivers, cars, and tracks creates huge opportunities for companies seeking to spend marketing dollars via sponsorship.
ISCA benefits from the extensive cost required to build a competing racetrack coupled with its track record of successfully hosting popular races that are relatively limited in number. Its longstanding relationship with NASCAR [also benefits from the fact that] a single family, the France family, owns a controlling stake in both NASCAR and ISCA.
NASCAR, like most sports, has strong traditions. Fans and drivers are accustomed to having certain races at certain tracks on certain dates. Because fans’ loyalty to tracks is so strong, it would be extremely difficult for a competitor to enter a region with an existing track and usurp its races.
As a result, we see no serious competitive threats to ISCA’s position as the largest racing host in the nation. We believe the company will be able to increase revenue at an annual rate of 5.2% during the next ten years despite a short-term revenue drop of 11% in 2009.
Because ISCA has fixed costs associated with maintaining race tracks no matter how many people attend its races, we expect the drop in revenue to lead to operating-margin compression. However, operating margins should recover to around 30% as general economic conditions improve and consumers feel more confident about spending money.
Despite the short-term head winds that ISCA faces, we believe that the company will earn an economic profit during the next ten years as the company improves returns on invested capital by increasing the utilization of its tracks via an increasing number of events per year.
Though it faced exceptionally strong head winds from the recession, the moat remains quite wide and stable, while the stock price remains attractive. While premier NASCAR events are a big part of International Speedway’s moat, less-prestigious race series have room for popularity growth, and the company has begun using its tracks for non-motor-sports events such as concerts.
There is a medium amount of uncertainty surrounding International Speedway’s future results because of heavy reliance on discretionary consumer spending, uncertain track expansion, and industry maturity. However, we think the company will continue to earn returns on invested capital in excess of its weighted average cost of capital into the foreseeable future.
Our fair value estimate is $51 per share. (It closed just below $28.50 Monday—Editor.)
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