The current market dislocation has afforded investors the opportunity to buy into a a relatively debt-free company with a set of world class media assets for less than 10x recession-level earnings/free cash flow, and at half my estimate of private market value. As a bonus, the company is using all of their free cash to buy back stock, and has some sources of hidden value that may realize them cash that they can use to repurchase even more stock.

ISCA is one of three publicly traded companies that own and operate NASCAR racetracks. NASCAR has been discussed on this board before (see the DVD writeup from some years ago), so I'll try to keep the explanation of the industry brief. NASCAR racetracks hold a number of events, but over 90% of the revenue comes from Nextel Cup races, which most tracks host one or two of each year. The rights to host Nextel Cup races are the real assets, since the schedule for races is effectively full (there are 36 races), and each race comes with a slice of the NASCAR television contract. Racetracks derive their revenue from television rights, sponsorships, ticket sales, and ancillary sources such as concessions, parking, track rentals, etc.

The television rights are the prize here – they grow each year without the need for the owner to expend capital or anything else, and they are contracted far in advance with annual escalators. The current contract runs through 2014 and rights fees grow at 3% to 4% each year. Television rights for live sporting events are increasingly valuable, as they still attract large audiences and viewers won't skip commercials with their Tivos. Ad rates for sporting events have been rising rapidly as of late, probably for this very reason, and this will eventually be reflected in the next contract.

Sponsorships vary – some are year-to-year, and some are contracted over several years, but the long-term tailwinds are similar to that in television (think about the value of of calling a race the Pepsi 400, for example). In ISCA's income statement, sponsorships are part of “motorsports-related” revenue, which is a catch-all that includes television (which is half of that item) and luxury boxes, which tend to be tied to sponsorships but are more economically sensitive.

The main concern on Wall Street is obviously attendance, which has been weak recently thanks in part to rising gas prices, and will get even weaker as the economy goes into recession. Ticket prices are $50-$100, and most fans only go to one or two races a year, but this has to be balanced against the fact that going to a race often means traveling a couple of hundred miles in an SUV or RV, and most fans aren't incredibly wealthy. The EPS guidance provided by the company on last week's call of about $2.50 on the low end (which I use here) is a marked drop from this year and last year (which was $3 on the current share count), and I believe is far below a normalized level.

I won't waste space on reprinting the income statement here, but I estimate that next year, attendance is 30% of revenue, television and ancillary is 35%, sponsorship and other motorsports related is 25%, and food/beverage is 10%, though after accounting for the cost of goods, is more like 5%. EBITDA margins are 38%, reflecting the high margin and depreciation is 10% of revenue. Maintenance capex is $40-$50 million, two-thirds of depreciation of $70 million.

ISC owns a 676 acre piece of land in Staten Island, which they intended to use to build a track on before they ran into local opposition. It was supposed to be sold last year to ProLogis for $100 million, but the deal fell through. They are currently trying to sell the property, but it probably won't go for a while given the market. I give the land a value of $80 million.

ISC has $117 million on deposit with the IRS related to disputed accelerated depreciation on some of its tracks. The case seems to be coming to a close, and a negotiated settlement seems likely. I give ISC credit for $30 million of the total.

ISC owns a 50% stake in Motorsports Authentics, a collectibles retailer with $200 million in revenue. They paid $100 million for the stake, but the investment has not done well. It contributed a minimal amount to earnings this year, and won't do anything next year, as they restructure some of their long-term driver contracts. I estimate their stake is worth $50 million, or 0.5x revenue.

ISC has the ability to move races from smaller, older tracks to larger, newer tracks, and get an uplift in earnings. I believe they have held off doing so because they intended to move these races to new tracks that they haven't been able to build. They will move a race from an older track to the Kansas track in conjunction with the casino they are building there with Cordish, to open in 2011. They also have the ability to sell naming rights to their tracks, which they have only done at one track to date. They own land adjoining their tracks, which they have been able to get some value from through projects like the Kansas casino. I ascribe no value in my valuation to these hidden assets, but they are there, for reference.

It is helpful to think about tracks in two parts – the value of the standalone Nextel Cup race (which can be moved anywhere) and the value of the track itself (insofar as it adds revenue above the worst track). Races have sold at around $100 million when attached to an old track or a track being shut down (see the Rockingham and Martinsville deals), and recently a newer track sold for $70 million without a race (Kentucky).

Recent Transactions:

 

					Value/
Year	Track	Location	Cost	Races	Race	Capacity	Built
2008	Kentucky Speedway	Sparta, KY	$70.0	0		66,000	2000
2007	New Hampshire Int'l Speedway	Loudon, NH	$340.0	2	$170.0	92,400	1990
2007	Chicagoland Speedway	Joliet, IL	$203.5	1	$203.5	75,000	2001
2004	Martinsville Speedway	Ridgeway, VA	$194.8	2	$97.4	65,000	1947
2004	North Carolina Speedway	Rockingham, NC	$100.4	1	$100.4	60,113	1965
1999	Richmond Speedway	Richmond, VA	$215.6	2	$107.8	100,000	1951
1998	Las Vegas Motor Speedway	Las Vegas, NV	$215.0	1	$215.0	107,000	1996

Estimated ISC Private Market Value:

 

					Value of	Value of
Track	Location	Races	Capacity	Built	Races	Track
Auto Club Speedway	Fontana, CA	2	92,000	1997	200	100
Chicagoland Speedway	Joliet, IL	1	75,000	2001	100	100
Darlington Raceway	Darlington, SC	1	63,000	1950	100	0
Daytona Int'l Speedway	Daytona, FL	2 (+2)	168,000	1959	300	200
Homestead-Miami Speedway	Rockingham, NC	1	65,000	1995	100	100
Kansas Speedway	Kansas City, KS	1	82,000	2000	100	100
Martinsville Speedway	Ridgeway, VA	2	65,000	1947	200	0
Michigan Speedway	Brooklyn, MI	2	137,243	1968	200	100
Phoenix Int'l Raceway	Avondale, AZ	2	76,812	1964	200	100
Richmond Int'l Raceway	Richmond, VA	2	100,000	1951	200	100
Talladega Superspeedway	Talladega, AL	2	143,231	1969	200	150
Watkins Glen Int'l	Watkins Glen, NY	1	41,000	1948	100	0
		19
Total Value					2,000	1,050
		Private Market Value of Tracks				3,050
		Net Cash (Debt)				(323)
		Value of Hidden Assets (JV, NY land, tax case)				150
		ISCA Enterprise Value				2,877
		Shares Outstanding				48.9
		Per Share Value				$58.83
		Current ISCA Share Price				$27.78

 

Current ISCA Share Price				$27.78
Less: Per Share Value of Hidden Assets				-$3.07
Effective Share Price				$24.71
Estimated 2009 EPS				$2.50
2009 P/E				9.9 x

I believe that normalized earnings are about $3 per share, on the current share count, and assuming 2008 is about normal (not too good, not too bad). Given that ISCA owns irreplacable assets that will grow earnings at a 3%-5% annual rate far into the future, I think a 6% earnings yield is reasonable, even in the current environment. At this valuation level, the company is worth $51 a share.

The other part of the formula is share repurchases, which I believe is not reflected in guidance. At next year's guidance level, ISC will generate $120 million+ in cash flow, which will likely all be used for repurchases. At current prices, they will be able to repurchase over 4 million shares a year, out of 49 million shares outstanding. Note that there are only 27 million Class A shares (Class B shares are mostly held by the France family, which controls NASCAR and controls the company). Also, insofar as the hidden assets get converted to cash (specifically the land and tax case), they are available for repurchases as well. Eventually, if the share price does not recover, the company will be able to go private – note that net debt is 1x EBITDA.