Description

International Speedway (ISCA)

Share price:  $22.47
Shares outstanding (A + B): 48.7mm
Debt: 574mm
Market value: 1,095mm
Cash and s/t investments: 241mm
TEV:    1,428mm

TTM EBITDA-maintenance capex: 5.4x
TTM EBIT: 5.9x
TTM TV EBIT: 7.4x
 

        International Speedway was written up on VIC back in October 2008 at a price of $27.78.  It is now 20% lower and traded as low as $15.96 in the March sell off.  The continued deterioration in the economy and employment is going to make 2009 a painful season for NASCAR and International Speedway, and possibly 2010.  But the current TTM valuation of 5.4x EBITDA minus maintenance capex and 7.4x guaranteed long-term television contract EBIT is a compelling price at which to pick up one of the few publicly owned companies that participates directly in a major US sport.

        International Speedway is the bigger player in a duopoly (with Speedway Motorsports, TRK) that owns and operates almost all of the country’s major auto racetracks and hosts almost all of NASCAR’s major and minor races.  The company is tightly integrated with NASCAR and its controlling France family, with third-generationer Lesa France as CEO, and with the France family owning a 38% economic interest and a 68% voting interest.  International Speedway hosts 21 out of 38 of Sprint Cup races (Nascar’s premier and most profitable racing series), including the Daytona 500.  The majority of its operating earnings come from a revenue share from NASCAR’s guaranteed 4.5bb television contract, which began in 2007 and runs until 2014 and escalates at 2-3% per year.

        International Speedway has traded down with other consumer-sensitive stocks, with some justification.  The company’s revenues are sensitive to admissions and concessions sales, and to corporate spending on sponsorships and luxury suites, all of which are declining.  Half of NASCAR’s fan base earns $50,000 or less annually, so the impact of the recession and 2008’s high gas prices had a significant effect on attendance.  Expensive weekend trips to distant tracks that might cost $1000 or more are a luxury that can be replaced by watching a race on TV.

        NASCAR’s economics are also under threat from declining corporate spending on sponsorships, events and race teams; a recently declining TV audience; the US auto industry’s near-collapse; and fan and media perceptions that safety changes to cars have reduced the competitiveness of races. 

        However, NASCAR remains an immensely popular sport with an enormous fan base, second in television ratings only to the NFL.  While attendance has a cyclical economic component, overall attendance and viewing volatility are typical cycles of popularity for major sports, which appear to be caused by the ebb and flow of charismatic star athletes and high-profile rivalries and other transitory factors.  The “death of NASCAR” thesis is likely to be no more valid than overblown concerns in the 1990s about the death of baseball, or the death of basketball after the end of the Michael Jordan era.  NASCAR races still regularly draw 90,000+ fans and there is no indication that the sport is suffering any permanent impairment.  The sport has intense fan loyalty — a large percentage of fans travel more than 250 miles to attend a race.


NASCAR and its industry

        NASCAR and its associated businesses are simple to understand.  Entrepeneur Bill France created NASCAR itself, which in the 1940s and 1950s organized and legitimized stock car racing, and laid the groundwork for NASCAR racing to grow into a major sport.  NASCAR is the privately-owned sanctioning body of the sport, and is essentially an intellectual property company that promotes and licenses the NASCAR brand, primarily through the sale of television rights to NASCAR-sanctioned races, through the sale of NASCAR sanction rights to racetracks which hold the races, and through merchandise and other minor rights.  NASCAR also acts as the administrative and governing body for the sport, by structuring race series, regulating car and racetrack design, driver and team rules, etc.  

        The most important source of revenue is the national television contract that it negotiates with major broadcast and cable networks.  The current contract is for 4.5bb total and runs from 2007 to 2014, with Fox, ESPN and ABC as the biggest broadcasters, and generates about 560mm a year in revenue.  NASCAR keeps 10% of the TV revenue and pays 65% to race promoters and 25% to race team owners as prize money.

        NASCAR has a monopoly on stock car racing in the US.  Its only significant competitor in automobile racing is the Indy Racing League (IRL) which races open-wheel cars and has a much smaller audience, except for the iconic Indianopolis 500.  The most important NASCAR race series is the Sprint Cup, which is the “major league” of stock car racing and far and away the most profitable series.  The Nationwide series is one of the “minor league” series, it is also a stock car series but features lesser and/or less sponsored drivers and has a smaller fan base.  The Camping World truck series is the least popular and more of a niche product.


Racetrack owners and race promoters

        In the 1950s France began buying racetracks through a predecessor to International Speedway.  Over time International Speedway bought the majority of prime tracks in the US and host the majority of NASCAR races, with most of the balance being owned by Speedway Motorsports.  These two companies both own and operate almost all of the tracks used for NASCAR races, so the economics of the track owner and race promoter are one and the same.  The promoters pay NASCAR a sanction fee for each race, and also put up the purse/prize money for each race, and of course provide logistics and organize each race pursuant to NASCAR guidelines.

        The racetracks earn money from the 65% share of television contract revenue, and also admissions, concessions, multi-year corporate sponsorships, such as naming rights to specific races, and to racetracks such as the Auto Club of California Speedway in southern California, and other deals such as a multi-year Coca-Cola concession contract, and also souvenirs to a smaller extent.   ISCA’s major corporate sponsors include Coca-Cola, DeWalt, Sunoco, Toyota, Bank of America, SunTrust, UPS, Home Depot, Sprint, Gatorade, Tylenol and Anheiser Busch.  Several of these contracts are 5-10 years in length.

        Sprint Cup races are the most prized by the promoters.  NASCAR allocates over 90% of shared television contract revenue to Sprint Cup races, and the races are by far the biggest draw for fans.  The Sprint Cup race sanctions are allocated as follows:  21 to ISCA, 12 to TRK, 2 to Dover Downs, and 3 to private promoters.  The allocation of races has not changed in many years, and TRK and ISCA do not seem to compete with each other for the allocation and location of races.  However, both companies will buy independent tracks that have been allocated Sprint Cup races, sometimes in order to close that track and move it to a bigger, more profitable venue.  The companies also will build new tracks and move Sprint Cup races there with NASCAR’s approval.


Racing teams

        The other significant related business is the racing teams, which are independently owned and largely supported through major and minor corporate sponsors (including GM, Chrysler, Ford and Toyota of car manufacturers, and mass market companies such as Home Depot and UPS), along with the 25% of the television contract which is provided as prize money from races.

        One interesting point about NASCAR’s structure is that unlike all other major sports except golf, neither the “star athletes” nor the drivers as a group have any leverage to increase their claim of the overall revenue of the sport.  The drivers are not unionized, and they are paid by the teams that own them, which are funded by prize and purse and by corporate sponsors.  A succesful star driver like a Tony Stewart or a Dale Earnhardt Jr. can only earn more money from NASCAR through earning a bigger share of the 25% allocation, but cannot get a multi-million dollar contract from NASCAR.  Instead, his earnings come from the prize money he earns for his team, and by his increasing value to corporate sponsors.


NASCAR’s greatly exaggerated decline

        Much has been made of NASCAR’s declining attendance and TV ratings.  NASCAR and the track owners do not release admissions revenue, but ISCA’s 2008 admissions revenue declined 6.9% yoy from 2007, and in Q109 further declined 14.9% vs. Q108.  ISCA began discounting tickets in 2008 and says they will be more aggressive in 2009, so the decline in admissions revenue may overstate the decline in attendance.  However,  NASCAR had explosive television ratings growth from the late 1990s until a peak in 2005.  Ratings decreased in 2006 and 2007 but television viewership increased yoy in 2008, suggesting that there has not been a significant decline in fan loyalty, and that attendance should rebound after the recession.  NASCAR’s television ratings growth from the 1990s until 2005 was counter to a long-term decline in ratings for the other major sports, and was critical for NASCAR to win its blockbuster 2007-2014 television contract. 


        While year-to-year ratings and ratings trends are important, the most important factor in television revenue is the ability of NASCAR and the other sports to negotiate significant contracts with the broadcast and cable television channels.  NASCAR’s new 4.5bb contract provides approximately 560mm in average annual revenue through 2014, as opposed to 400mm under the previous contract.  Major sports are arguably the most important content for cable and broadcast TV, giving the sports leagues a lot of bargaining power.  Sports deliver the last mass audience which attracts national advertisers.  For cable and satellite TV, premium sports channels are necessary to attract and retain viewers who have no other viewing option for live sporting events and sports commentary.  For example, ESPN commands the highest fees from cable operators by a wide margin over other premium channels.  Reality TV and sports are among the few shows which need to be watched in real-time for maximum enjoyment.

Why International Speedway?

        NASCAR qualifies as a great business, with very high and largely guaranteed monopoly returns on a small asset base consisting mostly of intellectual property.   NASCAR is an enduring sport, with economics that are very skewed towards the IP licensor and with very little leverage from the tracks and the drivers.  Price increases that at least keep up with inflation and probably exceed it are priced into the television contract.

        Unfortunately, public investors cannot invest in NASCAR.  They can however invest in International Speedway at a large discount to intrinsic value.  (Compared to publicy-traded competitors Speedway Motorsports and Dover Motorsports, ISCA is less levered, has more races, and is partially aligned with the economic interests of the France family.)  ISCA is not as well positioned as NASCAR itself, with greater economic risk due to admissions and corporate sponsorship volatility, and due to dependence on NASCAR’s race allocation, television revenue allocation, and sanctions fees.   However ISCA earns very good and consistent returns on a bigger capital base, and as the owner of the majority of NASCAR tracks in the country, it has no competition, and the substantial ownership stake of the France family appears to align the company with NASCAR’s interests.

Valuation

At a share price of $22.47 and with 48.7mm shares outstanding, ISCA’s market cap is 1,095mm.  As of end of Q1 (Feb) the company had debt of 575mm and unrestricted cash of 241mm, for a TEV of 1,428mm.  Note that there is a tax liability of 163mm and a IRS deposit of 118mm and long-term restricted cash of 36mm, all of which I am excluding from the calculation of TEV.  The tax liability, relating to depreciation methods, is on appeal with the IRS and has decent odds of being reduced.

Over the last twelve months, ISCA generated 243mm in EBIT.  193mm of that is ISCA’s net TV revenue share (262mm gross TV revenue less 69mm driver’s share — these numbers do not appear on the financial statements but are reported elsewhere).  The TV revenue has a 73.6% margin, which a bit deceptive as the only expense counted against gross TV revenue is the pass-through driver’s cut.  The rest of the 49.9mm in EBIT is generated from admissions, corporate sponsorship, and food and beverage sales, at a 9.7% margin.  Those margins are under pressure and fell to 2.8% in Q109.

Depreciation and amortization was 71.9mm and maintenance capex is 50mm (per the company, or about 4mm per track which seems reasonable). EBITDA – capex = 266mm, for a multiple of 5.4x, compared to 7.4x multiple solely on the TV-generated EBIT.

Assuming that during 2009 and 2010 ISCA can break-even on the admissions, sponsorship and concessions sales, 7.4x guaranteed TV EBIT is a comfortable valuation for a duopoly provider to a major sport where fans and corporate sponsors are likely to return. 

        It is quite possible that ex-TV EBIT doesn’t just go to zero but goes negative in 2009 and 2010.  Admissions and food and beverage have some cost variability but only to a certain extent. Corporate sponsorships have higher variability and are less likely to go negative.  It’s difficult to quantify what losses could be, but if ex-TV EBIT swung from +49.9mm to -43mm, so that total EBIT fell to 150mm (i.e., TV EBIT of 193mm less 43mm), ISCA would be trading at a 9.5x EBIT multiple of these highly depressed earnings.

        Motorsports Authentics is the company’s joint venture with TRK to market NASCAR-related merchandise.  ISCA has written down its investment in the JV, which has had several money-losing years and has brought in new management.  We don’t have any idea of what kind of profits could be generated in the future, but given the popularity of NASCAR it would seem likely that Motorsports Authentics generates EBIT for ISCA over time.

        In addition, there are other assets and real estate development projects which could further improve ISCA’s valuation, but which I am not giving any value to above.

Racetrack and other assets

        Some investors have valued International Speedway on the value of the tracks and acreage owned by the company. However, I don’t think this is a meaningful approach, as the tracks themselves are of very little value without Sprint Cup races, or some other equivalent national auto racing series if NASCAR were to disappear.  Tracks have recently traded at a value of around 100mm on a per-Sprint Cup race basis, but all that really tells you is what Sprint Cup races are worth.

        ISCA is currently carrying a tax liability of 163mm partially offset by a 117mm deposit with the IRS.  ISCA seems confident that the dispute will settle for less than 163mm; there is some chance that ISCA recovers part or all of its IRS deposit.

        ISCA is part of a joint venture seeking a contract to develop a casino and hotel complex adjacent to its Kansas City speedway.  If this joint venture succeeds, a comparable venture is Dover Downs Entertainment, the casino and horse racing facility next to Dover Motorsport’s Delaware track.  DDE’s TEV is 290mm.

ISCA is also developing a Daytona Live! entertainment center next to the Daytona track, of unknown value.

Relationship with NASCAR

         The overlapping ownership of NASCAR (which is believed to be 100% owned by the France family) and the 35% France family ownership of International Speedway raises obvious conflict of interest issues, both for ISCA vis-à-vis NASCAR and ISCA vis-à-vis other track owners.  NASCAR is believed to be worth at least 2bb-3bb dollars, with 18.75% owned by Lesa France, 18.75% owned by her brother Brian France (CEO and chairman of NASCAR), 36% owned by their uncle Jim France, and the balance by other France family members.  The France family equity interest in International Speedway, worth roughly 437mm dollars (and nearly 900mm as recently as September 2008) is fragmented among the three Frances above, along with dozens of France descendants and associated trusts and corporations.  France NASCAR interests and France ISCA interests seem to be partially but not wholly aligned. 

        The main concern for ISCA shareholders is the incentive for NASCAR to squeeze revenue out of International Speedway, by changing television contract allocations and/or by increasing sanction fees.  I believe that the substantial France ownership of ISCA gives the family an incentive to maintain the value of International Speedway, even if ownership interests among individual family members do not perfectly align.  Further, the television rights allocation of 10% NASCAR, 65% track owners, and 25% drivers has been constant through this television contract and at least the prior one, and sanctions fees seem to increase more or less in line with the 2-3% annual TV contract escalator.  So NASCAR has been consistent in its dealings with the tracks.

        As to other track owners, it has been a repeated complaint that NASCAR favors ISCA at the expense of the other companies.  An antitrust suit was recently brought against NASCAR and International Speedway for NASCAR’s refusal to grant a race to the private owner of Kentucky Speedway, a track built in 2000 for 150mm with the intent of earning a Sprint Cup race (and later sold for around 80mm to TRK, so that TRK can relocate a Sprint Cup race there).  In 2002 another antitrust suit was brought by an TRK shareholder demanding that a second Sprint Cup race be allocated to TRK’s Texas Motor Speedway (the suit seems to have been encouraged or even supported by TRK).  The suit settled with ISCA selling a North Carolina track to TRK for 100mm, and TRK moved that track’s Sprint Cup race to the Texas speedway.

Decline in US automakers

        The big US automakers and Toyota spend substantial amounts on NASCAR, although for ISCA and TRK the contribution is only about 10-15% of their revenue.  GM is believed to normally have spent about 130mm overall on NASCAR but to have cut that to 85mm recently; Ford normally less than 100mm and probably down to 60mm, and Chrysler down from 50mm to 30mm.  Toyota is likely to be spending 100mm a year still given they are a new entrant.  It is very unlikely that the roughly 500mm in annual spending by the auto makers goes away entirely, as NASCAR is a unique venue marketing automobiles.  The manufacturers generally have large showrooms at the events, where roughly 100,000 potential customers are present.

        A large and continuing pullback by the automakers would have the biggest impact on the racing teams which are sponsored by the automakers.  If those teams switched to unbranded cars and could not find equivalent sponsors, that loss in revenue would likely require more revenue sharing with teams from NASCAR and the track owners.  NASCAR could mitigate the impact through shrinking the field of cars from the current 36.  Also, several big teams in the last year have gotten investments from private equity investors, most notably Boston Venture’s investment in Richard Petty Motorsports.  So a large reduction in NASCAR spending by Ford and the auto GSEs can be offset to some extent.

At current TTM valuation of 5.4x EBITDA minus maintenance capex and 7.4x guaranteed long-term television contract EBIT, International Speedway is a cheap way to buy into the television contract of a major US sport.

Catalyst

Valuation and eventual rebound of NASCAR racing