Description
DOVER MOTORSPORTS INC. (DVD) $4.75, 10/29/04
SUMMARY
I am recommending a long position in Dover Motorsports (DVD) as a turnaround value investment. The company has identifiable catalysts and provides a margin of safety backed by a substantial amount of relatively unencumbered real estate and possesses attractive tangible private market value comparables. DVD participates in the auto racing entertainment industry along with much larger competitors Speedway Motorsports (TRK), International Speedway (ISCA) and the privately held Indianapolis Motor Speedway.
The company owns 4 permanent auto racing tracks consisting of approximately 3,000 acres in total in key secondary metro markets. As of this quarter the company had close to $46MM of debt, around $143MM of book value and real estate that is estimated to be worth approximately $375MM versus an enterprise value of $198.5MM. In addition, a recent transaction in the industry puts the value of their Dover track at between $200MM to $250MM by itself—in essence getting the other tracks for free. Though earnings are currently depressed, the company remains free cash flow positive.
Furthermore, the company’s largest shareholder is the estate of the founder, serial entrepreneur, John “Big John” Rollins, accounting for over 25% of the stock (he passed away in 2000). The company has spun out the Dover Downs Casino (ticker: DDE), which is adjacent to the auto stadium, in March 2002 to focus operations for a potential sale or recapitalization.
BACKGROUND
The business started out as a one track owner in Rollins’ home state of Delaware in 1967, one of many businesses Rollins and his brother started. The duo founded Rollins Environmental, Rollins Truck Leasing and Matlack Systems among others. Long time business partner to the Rollins, Henry Tipple, 77, is the current Chairman of DVD.
Beginning in 1997, the company started an expansion drive by buying Nashville Speedway USA. Then next year the company bought the Grand Prix Association of Long Beach, CA which included two other permanent tracks in St. Louis and Memphis. In 2002, they added a Grand Prix race in Denver and started another in St. Petersburg, FL.
AUTO RACING
I have a funny feeling that VIC members are not all that familiar with auto racing so let’s start with a quick primer. There are two major schools of auto racing, open-wheeled and NASCAR (stock car). Open wheeled is the stuff you used to be able to see on ABC’s Wide World of Sports like the Monaco Grand Prix or at the Indy 500. It is considered less working class—witness Paul Newman’s Open Wheel team. Open Wheel recently suffered a schism between the two governing bodies and one of them, CART, ultimately filed for bankruptcy last year which hurt this school of racing.
NASCAR has had an opposite trajectory. This is racing for the masses; in fact, it attracts the exact same advertising demographic as the NFL but comes at advertising rates much cheaper than the NFL. This partly explains the explosive growth of NASCAR. Last year, Nextel made a $750 million, 10-year agreement to become title sponsor of NASCAR's premier series, replacing Winston cigarettes. As a point of reference, NASCAR has 17 of the 20 highest-attended sporting events in the United States. NBC, who has most of NASCAR’s television rights, put 7 of their 38 broadcasts on during primetime this year. NASCAR’s ratings jumped 59% from 2000-2002. Many believe NASCAR is in its infancy in terms of popularity just as the NFL was in the 60’s and 70’s. The economics are driven by growing the fan base, expanding the number of parks, races, race circuits (like intra sport leagues) and creating bigger purses to attract the premier drivers. Which is why DVD’s assets (found in key secondary markets) are so important.
A WRONG TURN INTO OPEN WHEELED RACING
Part of Dover Motorsports’ growth plan in the late 1990’s was a bet on both types of racing, NASCAR and Open Wheel. The company expanded into the three previously mentioned CART races which turned out to be a failure. Without a successful association to back up this type of racing, the races suffered due to lack of growth in advertising revenues, small purses to attract good drivers and lack of a franchise value to provide growth. DVD shuttered the races in Denver and St. Petersburg and wrote down these investments (over $23MM). Management has kept Long Beach open for now. This foray into CART racing was a distraction and waste of investment capital. With the downturn in advertising and corporate hospitality and discretionary income, the company could ill afford the poor decision.
MECHANICS OF THE BUSINESS
Dover contracts with the various governing bodies which administer the leagues that sponsor the races (NASCAR for the NEXTEL and Busch and Truck series, the IRL for open wheel racing and the National Hot Rod Association for hot rod races). As part of the financial arrangement with the sanctioning bodies, Dover pays those organizations sanction fees and ponies up money for the winning purse. Generally there is no acquisition cost of the race, though acquisition of a track includes races held there. Sometime tracks are acquired with the thought of petitioning the governing body to move the race to another track the acquirer owns once the track is acquired. Contracts are successive one-year contracts continually renewable.
Revenues come from the following four sources:
1. admissions / ticket sales
2. broadcasting fees paid by TV networks to broadcast events
3. sponsor, hospitality and other revenue, which include sponsor and promotion fees, luxury suite rentals, hospitality tent and expo rentals and other related revenue
4. food, beverage and merchandise revenue
’03 Breakdown of Revenues:
Admission: $38.8 MM / 41.5%
Sponsor Hospitality and Other: $18.3 MM / 19.5%
Broadcasting Fees: $18.3 MM / 19.6%
Food, Beverage and Merchandise: $18.2 MM / 19.4%
Obviously, the business economics are fairly scalable—each racing event added to the track increases asset turnover and barely affects SG&A. The drivers of growth are improvements to attendance, hospitality and advertising as well as acquiring incremental races cost effectively. The number of events improved three years ago from 16 to 19, however two of those were CART races which were discontinued. The number of events in 2004 stands at 17. Dover promotes races with 4 of the major governing bodies and constantly seeks to add races based on risk / reward of risking promotion, sanction and purse fees versus the popularity of the race and what they expected payback would be from the four revenue sources listed above.
As the company adds races, which is an attractive move by the sanctioning bodies given their key secondary markets given the desire of the sport to grow, Dover stands in good stead to get their fair share of events.
THE REAL ESTATE
One of the merits of this investment that provide a margin of safety is the relatively clean balance sheet and large amount of real estate owned by the company. Below is a list of its major owned holdings:
1. Dover International Speedway: located in Dover, DE. The stadium has 140,000 capacity stadium on 747 owned acres.
2. Nashville Superspeedway: A 25,000 permanent grandstand seats with an infrastructure in place to expand to 150,000 seats as demand requires on 1,465 owned acres within 30 miles of downtown Nashville, TN.
3. Gateway International Raceway: The auto racing facility includes has 55,000 permanent seats. The facility, which is on 416 Acres (123 owned, 259 optioned), is located in Madison, Illinois, approximately five miles from the Gateway Arch in St. Louis.
4. Memphis Motorsports Park: The auto racing facility includes approximately 16,000 permanent seats on 350 owned acres. The facility is located in Millington, Tennessee, approximately 10 miles from Memphis, Tennessee.
5. 3000 Pacific Ave, Long Beach, CA.: The building has 80,000 square feet of land and 50,000 square feet of office and warehouse space.
Management estimates from third party work that the above owned real estate is worth approximately $375MM versus a book value of $226.5MM. Obviously, this is an estimate and from management to boot, but it offers financial cushion to sell off excess assets for liquidity, assets for mortgaging if a recapitalization is sought. Additionally, it provides a floor on the stock.
VALUATION
Current Capital Structure:
Current Share Price: $4.75
Shares Outstanding: 40MM
Market Cap: $190.2MM
Cash Balance as of 9/30/04: $0.9MM
Total Debt as of 9/30/04 $46.3MM
Enterprise Value: $188.9MM
LTM as of Q3’04
Revenues: $94MM
EBITDA: $19.5MM
Net Income: ($20.5MM)
EV / LTM EBITDA: 12.1X
LTM Cash EPS: $0.20 / Share (add back d&a and non-cash, subtract capex)
Implied P/E: 20.6X
P / BV: 1.3 X
P / TBV: 1.4 X
As of the last quarter, there was $28MM of outstanding debt from the company’s $70MM credit facility and an $18.5MM of IRB’s for the St. Louis facility. Over the last six quarters, the company has paid down $27MM of debt outstanding. In a recent discussion with management, they indicated that they have continued to whittle down the balance during this current quarter.
On a TTM basis, FCF to equity comparables are:
ISCA DVD TRK
FCF Yield to Equity (TTM) 4.2% 9.3% 4.4%
As the CART debacle and the poor advertising and hospitality market recovers, I would expect DVD’s yield to trade at less of a discount to its main competitors. For example, a 6% yield at a more normalized $15MM - $20MM FCF earnings power (which would include 1-2 incremental races per year to make up for the CART closures), would yield a valuation $6.25 – $8.33 per share. As a point of reference, the company was able to produce EBITDA in the $25MM range in ’00 and ’01 before the poor investments and in a better advertising market (with only 16 events in those years versus the current 17).
This does not count the excess real estate which I would believe would garner incremental value in a transaction or provide value if they wanted to create additional liquidity through separate parcel sales. A recent sale / settlement in the industry put a value for a NEXTEL cup event at approximately $100MM per race. DVD has two of them. Given the other races at the Dover facility other than the Nextel events, would put their Dover track alone at $200MM to $250MM which accounts for the enterprise value alone.
Risks to the Investment
1. NASCAR governance: There is a huge conflict in that the France family controls NASCAR and ISCA (one of the major players). This creates instability for the league.
2. New tracks in DVD’s key markets: NASCAR could sanction new tracks that sap the attendance and local advertising dollars available for DVD tracks. In fact, there is a lot of talk about a possible NYC track which could potentially harm DVD’s Dover track. Management believes it would grow Eastern Board local interest and increase attendance. You make the call.
3. More and more, we hear from all sorts of businesses, even Walmart, how the weather can negatively impact their sales. Well, with these guys, it really does matter. They only get 19 or so opportunities a year to hold events so if one gets blown by the weather, it can be material.
4. New CEO at NASCAR: In addition to the risk in point #1, Brian France, son of former head Bill Jr., took over the helm of NASCAR. Many in the industry are leery of his push into Hollywood and its potential to alienate core fans.
5. NASCAR growth: One only needs to look at a competition car or a driver’s racing suit to notice how crowded they are with advertising logos. Growth in advertising revenue could have peaked.
6. Independent valuation of the real estate: There is no assurance the real estate is worth anything close to the estimates. Only a true sale or actual mortgage will substantiate it.
7. This could be a Value Trap: There is no guarantee that the business will turnaround or grow significantly from here or that management will monetize the assets and return value to shareholders.
8. They may not be able to get additional races to grow their revenue base.
CONCLUSION
This investment has several appealing qualities as a value investment:
·The company produces free cash currently
·Management is using cash to pay down debt
·There is significant real estate value to serve as a floor for equity value if not further value in and of itself to shareholders
·The major shareholder is an estate serving as a catalyst
·The industry is growing
·Two main competitors are potential acquirers
Catalyst
CATALYSTS
1. Possible sale of the company
2. Possible recapitalization of the company using its assets
3. There is a 2MM share buyback outstanding
4. Further business improvement and repayment of outstanding debt
5. Addition of more races the schedule thus increasing FCF