Description

International Speedway (ISCA) is an underappreciated stock with (a) improving NASCAR audience; (b) hidden asset; and (c) temporarily depressed revenue and cash flow.  ISCA currently trades at 8x 2015 EV/EBITDA, excluding our estimated value of $6/share for its hidden asset (Kansas casino JV).  Even though the stock has risen 17% since the beginning of March, we think there is still plenty of upside as investors begin to appreciate the following:

• Improvement in NASCAR TV ratings and track attendance
• 10-year broadcast rights revenue growing at 4% CAGR starting 2015
• Growing annuity from Kansas casino joint-venture
• Step-up in cash flow in 2016 as Daytona enhancement capex winds down
• Proceeds from Staten Island property sale
• Increase in cash dividends and resumption of stock buyback
• Potential REIT conversion (if the lawyers can figure out the right structure)

Our base case valuation is $50/share (+37% upside), with our low case at $30/share (-17%) and high case at $65/share (+77%).

Company background

ISCA is the largest owner and operator of NASCAR-sanctioned racetracks in the U.S.  ISCA was founded by Bill France, who also founded NASCAR.  The France family owns 72% of voting rights and 39% economic interest in ISCA.  Through organic growth and various acquisitions, ISCA today has 13 tracks across the country: Daytona, Talladega, Darlington, Watkins Glen, Phoenix, Kansas City, Chicago, California, Richmond, Martinsville, Homestead-Miami, Route 66 and Michigan.  ISCA also has a 50/50 joint venture with Penn National Gaming for the Hollywood Casino at the Kansas Speedway.

Revenue segments

·      Admissions ($130m in revenue in 2014; 20% of total): tickets sales for NASCAR and other events held at the properties.

·      Motorsports ($434m in revenue in 2014, 66% of total): NASCAR broadcast fees, corporate partnerships and other motorsports related revenues such as parking and camping revenue and track rentals.

·      Food & Beverage and Merchandise ($73m in revenue in 2014, 11% of total): concession stands, catering services paid for by third parties and direct merchandise sales (now outsourced to Retail Fanatics).

Why the opportunity exists

·      Underfollowed on Wall Street: Like is cousin Speedway Motorsports (TRK), ISCA is not widely followed.  There are six listed analysts, but only four bothered to ask questions at the most recent earnings call.  The biggest broker Citigroup didn’t check in.

·      Misguided view of NASCAR in secular decline: No doubt NASCAR’s popularity has declined since its peak pre-2008 recession.  Over the past year, however, NASCAR TV ratings have begun to stabilize and are up in majority of Sprint Cup broadcasts so far this year.  ISCA reported that attendance is also up in all its races through Martinsville this year.

·      Misunderstanding of 2015 guidance: Optically, the midpoint of ISCA’s 2015 revenue guidance represents 5% decrease from 2014.  However, this decline is solely due to changes in ISCA’s merchandise business.  2014 saw a one-time step-up in merchandise revenue as ISCA consolidated its 50/50 merchandise JV with Speedway Motorsports to a 100% ownership structure.  In 2015, ISCA is transitioning its merchandise business to a 3^rd party and will collect a percentage of sales instead. 

·      Ignorance of hidden assets:  Macquarie’s March 2015 initiation report on ISCA did not factor in the value of the Kansas casino JV in its EV/EBITDA valuation of ISCA.  We find this omission significant since the JV distributes $0.50/share in annual cash flow back to ISCA.

Investment positives

·      Improving TV ratings and track attendance: As stated above, NASCAR TV ratings have stabilized over the past year and are up in majority of Sprint Cup broadcasts so far this year.  ISCA reported that attendance is also up at all its races through Martinsville this year.  In addition, ISCA benefits from lower gas prices as its core fan base is sensitive to fuel costs.

·      10-year broadcast rights revenue: NASCAR signed a new deal that just started in 2015.  ISCA expects broadcast revenue to reach $314m in 2015 (50% of total revenue), representing an increase of 3.8% from 2014.  Over the 10-year period thru 2024, broadcast revenue will increase at 3.9% CAGR.

·      Growing annuity from Kansas casino: ISCA has a 50/50 joint venture with Penn National Gaming for a casino and entertainment facility next to its Kansas Speedway.  Penn is responsible for the operations of the casino while ISCA receives its share of the profits.  ISCA expects pre-tax cash distribution of $22-24m from its casino JV in 2015, up from $22m in 2014.  ISCA expects this amount to increase annually as long as casino revenue continues to grow.

·      Step-up in cash flow in 2016: ISCA will spend $200m capex in 2015 with the vast majority going into its ongoing Daytona enhancement project (better seating, more concessions, and more sponsorship opportunities).  The company expects capex to decline to $60-70m annually after 2015.  Importantly, ISCA anticipates reaping the benefits of its Daytona project in 2016 with incremental revenue of $20m and EBITDA of $15m.  This situation is somewhat similar to Madison Square Garden (MSG) when it embarked on a large capital improvement project but showed a big step-up in cash flow as the project concluded.

·      Proceeds from Staten Island: ISCA sold its 676 acres of property located in Staten Island, NY in 2013.  ISCA has been receiving interest payments thus far from the buyer but will receive a final balloon payment of $67m in March 2016.  ISCA will not pay taxes on the proceeds because the property was sold at a loss.

·      Increase in cash return to shareholders: As ISCA winds down capex in 2016 and sees rising EBITDA/cash flow, we expect increased cash dividends and resumption of share buyback.  ISCA had bought back $200m of stock in 2007 and 2008.  Buybacks were modest after the recession and stopped in 2013 as the company began its Daytona project.

·      Potential REIT conversion (if the lawyers can figure out the right structure): ISCA’s CFO told us that he has been speaking to his Kansas casino JV/Penn National Gaming counterparts about Penn’s REIT conversion process.  Although nothing is imminent due to the France family’s economic interest in ISCA, the fact that ISCA’s management is contemplating this possibility give us an indication on ISCA’s thought process.

Valuation

We derive ISCA’s equity value by estimating its sum-of-the-parts:

(a)    Racetracks on EV/2016 EBITDA, plus

(b)    Kansas casino JV on EV/2016 pre-tax cash flow, plus

(c)    Proceeds from Staten Island property sale, minus

(d)    Net debt estimated at end of 2015

For the base case, we assume the midpoint of 2015 EBITDA guidance range as our starting point for 2016.  We added incremental EBITDA contribution from the Daytona project and growth in 2016 EBITDA in others – admissions, motorsports-related, etc.  Our low and high cases are based on different EBITDA, cash flow and multiples assumptions for racetracks and casino JV.

The EBITDA multiples we used for Racetracks range from 7 to 12.  For comparison, TRK trades at 9x 2015 EBITDA and Six Flags (SIX) trades at 13x 2015 EBITDA.  ISCA should trade at a slight premium to TRK as it has higher quality assets such as Daytona and a closer relationship to NASCAR.  As 2016 approaches, we believe this premium will be reflected in ISCA’s forward multiples.

Note: Management guidance for 2015 is $180-195m in EBITDA and $22-24m in cash distributions from casino JV.  Cash flow from casino JV is incremental to EBITDA guidance.

Risks

·      Decline in admissions: NASCAR’s core audience has been sensitive to economic downturn.  In addition, weather has been a major factor in lower attendance in some races in 2014.  Thus far in 2015, ISCA has seen higher attendance at its racetracks.

·      Buying racetracks: ISCA has not denied its interest in buying Pocono, Dover or Indianapolis.  However, ISCA is unlikely to acquire any of these tracks in the foreseeable future. First, the track owners must be willing to sell.  Second, prices must be low.  ISCA’s CFO does not believe both of these conditions will be met because the lucrative broadcast contract has raised expectations for potential sellers.

Catalyst

·        Improvement in NASCAR TV ratings and track attendance

·        Growing annuity from Kansas casino JV

·        Step-up in cash flow in 2016 as Daytona enhancement capex winds down

·        Proceeds from Staten Island property sale

·        Increase in cash dividends and resumption of stock buyback

·        Potential REIT conversion (if the lawyers can figure out the right structure)