Description

Speedway Motorsports, $22.03 (12.30.14)

Thesis Overview

At $22.00, Speedway is a buy because of its high free cash flow yield (10% to the equity), the increase in revenue and earnings the Company will generate from the new TV broadcasting contract NASCAR just signed with Fox and NBC Sports and the downside protection, current price to book equity is 1.0x, afforded to equity holders by the asset value the Company has in the form of its racetrack properties (the Company owns 10,000 acres of land in various “metropolitan” markets around the country).

Valuation
Shares: 41.4
Equity Value: $785mln
Cash 115mln
Total Debt 486mln
Enter. Value $1,160mln
Dividend Yield 3.1%
Price / Book 1.0x

Investment Highlights

1. NASCAR recently announced a new media rights contract with Fox Sports and NBC Sports that increased the per year payment to NASCAR and its racing partners (the tracks and the teams) from $560mln per year to $820mln per year or a 46% increase. According to the latest International Speedway (“ISCA”) Investor Presentation (and their 10K), the track owner currently gets 65% of this fee, the competitors receive 25% and NASCAR keeps 10% and they expect this arrangement to stay in place for the new contract
   

2. SMS’s recent debt refinancing increased cash available to equity by $20mln or $0.48 per share. The Company also has a long history of paying dividends to shareholders and has reduced net debt from $630mln at the end 2008 to $370mln in the latest quarter ending 9/30/13

3. The Company is trying to increase the utilization of their facilities through alternative uses and finally got their first big win in the form of the Battle of the Borders, which is a college football game between Virginia Tech and Tennessee at Bristol Speedway in 2016. It will be the largest football ever attended, with over 140,000 expected attendees (as an indication of interest in the event, Tennessee has already sold out its ticket allotment). SFC estimates that the event could generate $6.8mln of EBITDA. The initiative is only really value enhancing if they can replicate an event like this year after year.

Investment Risks

1. Attendance across NASCAR events has been in steady decline and SMS has underperformed its biggest competitor, International Speedway, in the past couple of years

2. There are some potentially shady dynamics at play in the ownership structure of the business and the industry.

   1. The business is majority owned and controlled by a single holder, Bruton Smith, so you are along for the ride
      Mitigant: The new credit facility has fairly restrictive covenants on the new term loan facility that forces the business to delever

   2. Speedway’s biggest competitor is International Speedway which is majority owned by the France family. The France family owns NASCAR so may choose to economically favor ISCA in terms of TV contracts
      Mitigant: The government has already gone after the France family once in 2004 for antitrust considerations and made them divest a racetrack to Speedway

3. The Company has a deferred tax liability of $385mln and does not currently pay cash taxes. The Company expects this to reverse at some point but the timing and the magnitude are uncertain

Company Overview

Speedway Motorsports’ primary business is promoting, marketing and sponsoring motorsports events. The Company owns and operates 8 racetrack facilities in the United States that earn the majority of their revenue from NASCAR events. They have five major revenue streams i) admissions (24% of ’12 revenue), ii) Nascar Broadcasting (‘39% of ’12 revenue), iii) Sponsorships (12% of ’12 revenue, iv) event related which includes food and beverages sales, track rentals, radio broadcasting etc. (17% of ’12 revenue and v) souvenir sales and other (8% of sales). Below is some detail on their 8 properties. The Company has hosted 24 NASCAR races at their facilities in each of the past 4 years.

Revenue and EBITA Margin Trends

Credit Summary

Speedway completed a full refinancing of its credit facilities and took out a high-coupon bond during the first half of FY2013

The covenants of the new term loans are as follows:

• Total Debt to Debt no greater than 3.5x that steps down to 3.25x at the end of ’14 and 3.0x by the end of 3.0x (current leverage 3.3x, but net debt to EBITDA is 2.3x)

• Interest Coverage of greater than 2.25x

• The Company has to pay off 5% a year of the initial loan per year ($12.5mln per based on the initial amount borrowed)

Ownership, Equity Structure& Dividends

Speedway Motorsports is majority owned by its founder and CEO, Bruton Smith. Smith, who at 86 is the oldest CEO in the Fortune 500, founded SMS in 1959 when he built Charlotte Motor Speedway. He also founded Sonic Automotive which is a $1.2bln public company of which he owns 21% and is also CEO. Below is a summary of the top five owners of SMS:

SMS currently pays a quarterly dividend of $0.15 per share which represents a 3.2% yield based on the current stock price. The Company last increased the dividend in 4^th quarter of CY2011. The Company also has a share repurchase agreement in place that allows for the purchase of 244,000 shares (0.6% of current shares outstanding).

M&A

Speedway has spent $890mln on M&A over the past 15 years. The majority of the money has been spent acquiring different racing facilities.

Catalyst

2015 will be the first year of the new TV contract