Some quick thoughts on International Speedway

International Speedway (ISCA) founded in 1953, owns and operates motorsports entertainment facilities. It hosts number of stock car, sports car, open wheel and motor cycle events including the famous NASCAR sprint cup series, which is the most popular form of motorsports in the United States.

The NASCAR racing season runs for 10 months, visiting 21 states across the country, and frequently attracts more than 100,000 attendees at each Sprint Cup Series racing event.

ISCA is among the largest owners of these entertainment facilities based on revenues, number of motorsports events operated and number of facilities owned. It owns 13 of nation’s major motorsports facilities like iconic Daytona international speedway in Florida and Kansas speedway in Kansas.

Their facilities currently have approximately one million grandstand seats and 530 suites. 

Isca earns more than $600 million in revenues and generates substantial cash flows primarily from admissions, television and ancillary media rights fees, promotion and sponsorship fees, hospitality rentals (including luxury suites, chalets and the hospitality portion of club seating), advertising revenues, royalties from licenses of trademarks and track rentals. They own Americrown Service Corporation which provides catering, concessions and merchandise sales and service at their motorsports entertainment facilities. They also own and operate the Motor Racing Network, Inc. radio network, or MRN Radio, the nation’s largest independent motorsports radio network in terms of event programming.

Let’s accelerate to its balance sheet:

We have a quick ratio of 1.4x which is fine. It can easily cover its short term liabilities.

We have tangible book value of more than $922 million or $20 per share .  At $26 the stock is trading at price to tangible book value of 1.3x 

But book value mostly comprises of their properties that are not easily replaceable at their original cost. And their value will only appreciate with time. So book value understates its true asset values.

ISCA clocked more than $180 million in revenues in 1999 and has grown steadily at 15- 18 % during the past 10 years with more than $850 million in revenue in 2008.  Revenue declined a bit after that but had $630 million in revenues in current year .Recession being the culprit.As its 10-k mentions decrease in  sale of admission tickets as the reason of decline in revenues.

Long term debt amounts to $343 million and even if we add tax liability of $319 million we have total liabilities of $662 million which ISCA can cast off in 6-7 years with its normal free cash flow of $100 million.

Now there are 3 key questions I would ask as a potential investor and these are:
1, How is the business? Is it ordinary or outstanding?

2, Does it have a wide economic ‘moat’ that keeps competitors at bay? And is this  moat sustainable ?

3, Is it trading at an attractive price?

We take these one by one.

Sure watching motor races make your adrenaline rush. What about the business?

History of positive operating as well as free cash flow for 10 years is a major plus.

The speedways of ISCA-which require initial capital to build - don’t demand on-going heavy capital expenditures. And the company has used its copious operating cash flow for growth – adding seating capacity and building more speedways.

Their 2008 10 –k states:
We repaved Darlington Raceway (“Darlington”) and constructed a tunnel in Turn 3 that provides improved access for fans and allows emergency vehicles to easily enter and exit the infield area of the track. These collective projects mark the largest one-time investment in the 50-year history of the storied South Carolina facility.

Similarly , 2009 10-k states that in 2006 they..
repaved Talladega Superspeedway’s (“Talladega”) 2.6 mile oval. Talladega’s racing surface had not been repaved since 1979, and we believe the newly paved racing surface has enhanced the thrilling on-track competition.

The capital expenditure item in the cash flow statement cannot be accepted therefore at its face value. The 10-k’s give a rough estimate of their maintenance cap-ex which is roughly 50 % of total cap-ex on an average. So we will have to adjust  free cash flow margin  by eliminating growth cap ex after reading the notes in 10-k’s 

This is an outstanding business that spits our free cash around 16% of sales on an average of 10 years.That’s the beauty of the tracks which like oil pipelines don’t need much capital infusions. They just sit there allowing cars to race freely and cash to flow free freely into the business. The company also generates huge income from media rights.

It also earns good cash return on invested capital. The 10 year average comes around 10 %.

ISCA is a duopoly in its industry with the other being Speedway Motorsports (TRK). 

ISCA has 13 facilities and TRK has 8.

ISCA derives 90% of its revenues from NASCAR-sanctioned events. And TRK derives 84% .

They both have same operating margins at 35 %. TRK is trading at price to sales of 1.3x and ISCA is trading at price to sales of 1.9x.

But ISCA has on an average gushed out more operating cash flow at $200 million almost double than that of TRK (at $130 million)

ISCA is trading at EV/10 year average EBIT of 5.36 compared to that of TRK‘s EV/10 year average EBIT of 7.5
But ISCA clearly has a very good advantage over TRK.

Here's why...

If we read TRK’s risk factors in its 10 –k it says:

Motorsports promotion is a competitive industry. We compete in regional and national markets, and with ISC and other NASCAR related speedways, to promote events, especially NASCAR-sanctioned Sprint Cup and Nationwide Series events, and to a lesser extent, with other speedway owners to promote other NASCAR, IndyCar, NHRA and WOO sanctioned events. We believe our principal competitors are other motorsports promoters of Sprint Cup and Nationwide Series or equivalent events. Certain of our competitors have resources that exceed ours. NASCAR is owned by the France family, who also controls ISC. ISC presently hosts a significant number of Sprint Cup and Nationwide Series races. 

According to its latest proxy, France Family Group members, together, beneficially own approximately 40% of ISCA’S capital stock and over 70% of the combined voting power of both classes of common stock. Members of the France Family Group own and control NASCAR. James C. France, Chairman of the Board, and Leas France Kennedy, Vice Chairman and Chief Executive Officer, are both members of the France Family Group in addition to holding positions with NASCAR.

It’s very clear .We don’t need to further delve on its implications.
And this also keeps new entrants at bay. This infrastructure cannot be built in a day. It requires tons of cash and moreover a new company building this will not have to consider what it will put down to build this but also what  return /earnings will  it will  be able to take out of this venture. (In investing terms,  it could have the same or more book value but not more intrinsic value which comes from earning power)And for this it needs to host sprint races esp. from NASCAR . And it’s NASCAR that determines every year which track gets what race. And we know who it will favor. (In the computer industry it’s similar if not exactly same as Microsoft dominating the PC operating system. A good company can technically build a superior operating system but it will have tremendous trouble in persuading developers to develop its applications and PC makers to install them into their systems). 

So the business has tremendous barrier to entry. 

Isca's current enterprise value is around $1.3 billion. But it can’t be replaced at this tag. 

Its balance sheet shows property and equipment of around $1.3 billion. But I think this might be understated.

Although it leases 400 acres of Daytona international speedway it also owns real estate in US which is hard to replace at today’s cost and will command a premium carrying value in future.

For example:

•500 acres near Daytona on which we conduct agricultural operations except during events when they are used for parking and other ancillary purposes.

•TALLADEGA SUPERSPEEDWAY located in 1435 acres.
• KANSAS SPEEDWAY located in 1000 acres

And they have plans to monetize their real estate assets.

They have built Hollywood Casino at Kansas Speedway which features a 95,000 square foot casino with 2,000 slot machines.

A recent article on International speedway in Forbes magazine noted that:

Mark Boyar, president of Boyar Asset Management, which has been accumulating Speedway shares. He adds that corporate sponsorships of special events, such as the Sprint Cup series, as well corporate advertising should also pick up as the economic recovery gains more heft.

The article further observed that:
there is the company’s vast portfolio of real estate assets which, says Jonathan Boyar, enhances Speedway’s worth, adding up to a total valuation of $50 a share.

While it is certainly not impossible to appraise its land bank, it's best to value ISCA through its earning power rather than asset values. The earning power in future will depend how well the company monetizes its assets. An example of this being Kansas casino as company says it will add $0.20 per share before debt service to its net income by 2013. The management is doing a good job by reducing its share count through stock repurchase program.

And the revenues certainly should improve once the economy improves as people start spending more on premium entertainment.

What about long term popularity of NASCAR ?
This worries many investors.
Can its long term popularity decline ?
Of course. And this is worth thinking over.

Let's jump over the boundary of finance and enter into the world of Psychology.

Why do we enjoy watching wrestling again and again ?

You can watch it repeatedly and not get bored .

The thing transcends language. Even a caveman can enjoy it.

In other words it's PRIMAL !

This primal factor is present in watching NASCAR too.

In fact, it combines this primal factor with glamor.

And that makes people watch cars go in circles for hours.

As one  NASCAR fan puts it aptly on the net :

You miss the adrenline you get by hearing the engine sing at 200 MPH, the smell of racing fuel, burnt clutches and burning rubber. You will just have to go a race and take it all in to get a feel for it. TV does not do it justice.

And personally  I think this primal element won't let NASCAR decay over the long term.

Anyway, back to finance.

With 10 year average free cash flow(by only deducting maint. cap-ex) of $ 2.43 per share  the stock is trading at the price to free cash flow of around 10 implying a yield of 10 % at this point. Not that roaring a buy as NASCAR sports car at this point. Certainly attractive at 15% free cash flow yield for long term value investors. With good insider stake of 40%, above average return on capital and a wide moat business it should definitely make an investor’s -'stocks of quality companies to pounce on when they become cheap' list.