Fast Times at International Speedway
By Gary McDaniel
At Standard & Poor's, our positive outlook on the shares of International Speedway (ISCA; recent price: $55), which carries S&P's highest investment recommendation of 5 STARS (strong buy), is based on ISCA's financial strength and flexibility, its dominant position within NASCAR, and the continuing growth in NASCAR's popularity. We believe these factors will enable ISCA to generate free-cash-flow growth in excess of 20% annually over the next 10 years and to provide shareholders with superior returns.
ISCA currently operates 11 racetracks nationwide and promotes in excess of 100 races annually, although 85% of its revenues are derived from the 20 races it promotes in partnership with NASCAR. The rise in NASCAR's popularity is evident as Nextel (NXTL ), the current sponsor of the championship cup, paid $700 million over 10 years for sponsorship rights in 2003, compared with the $200 million over five years paid by the previous sponsor. According to a recent Gallup poll, 39% of men and 22% of women consider themselves auto-racing fans.
We believe NASCAR has been the fastest growing sport over the past decade and that its ratings now exceed those of the National Basketball Assn. and Major League Baseball. According to Nielsen data, ratings for NASCAR Cup races rose 2% in 2004, with its final 10 races, the Chase for the Nextel Cup, winning a 4.6 household rating, up 12%, and ratings for the final, decisive race up 38%.
ISCA should benefit from these higher ratings, in our opinion, when current broadcasting licenses are renegotiated, which should happen in 2006 for races broadcast on NBC and Turner Sports and in 2008 for races broadcast on Fox and FX. Until then, we expect that broadcast rights, which earned ISCA $188.9 million in 2004, will rise 15% to 21% annually under the existing contracts. Most of these broadcast fees flow straight to ISCA's bottom line, after it pays 25% into a point fund, which is used to pay NASCAR drivers.
We believe that ISCA has developed significant barriers to prevent competitors from usurping its role as the dominant NASCAR promoter. Both NASCAR and ISCA were originally founded by Bill France Sr., and are still controlled by the France Family Group via its 39% stake of outstanding shares. It also holds 62% of the voting power in ISCA. We believe this entrenchment with NASCAR provides ISCA with an "economic moat" that enables it to earn superior returns. In addition, ISCA owns many of the most popular racetracks in the industry, further protecting its dominance, in our view.
In our opinion, the evidence available bolsters our belief that ISCA has created barriers to its competitors. ISCA's two largest competitors are Speedway Motorsports (TRK; $37.12) and Dover Motorsports (DVD; $5.68). Of 36 NASCAR Nextel Cup races in 2004, ISCA hosted 20, TRK hosted 11, and DVD hosted two, with the others hosted by private companies owning individual tracks. Including Busch League and Craftsman Truck League NASCAR races as well, ISCA hosted 43 races, TRK hosted 26, and DVD hosted 12. In addition, ISCA was able to earn higher profit margins in 2004, 24% vs. 16% and 3% for TRK and DVD, respectively.
We believe ISCA will be able to expand profitably by successfully leveraging its competitive advantage within NASCAR. Its California Speedway hosted a second Nextel Cup race in 2004, after NASCAR shifted the Labor Day race from North Carolina to the California track at ISCA's request, a move that resulted in higher admissions, corporate sponsorship, and hospitality revenues.
ISCA has shifted another Nextel Cup event from Darlington to Phoenix, and we believe this will also result in significant gains for the company, as well as increase NASCAR's exposure outside of the Southeast, which we think will in time generate higher ticket sales and broadcast ratings and revenues.
In the longer term, we're encouraged by ISCA's plans to expand into areas that are currently underserved by NASCAR. Late in 2004, ISCA purchased 677 acres for approximately $110 million on Staten Island in New York City, on which it expects to build a three-quarter-mile racetrack, with 80,000 grandstand seats and 64 luxury boxes by 2010 at a cost of approximately $600 million. By Gary McDaniel
MORE THAN 100 RACES.
It's also exploring potential locations in the Pacific Northwest. We believe these areas are now underserved by auto racing and are likely to be very profitable markets when the expansion is complete. We expect corporate sponsorship and luxury-suite rentals to generate significantly higher returns in these new locations than those earned in most of ISCA's traditional markets.
At this point, ISCA owns and/or operates 11 major U.S. motorsports facilities: Daytona International Speedway in Florida; Talladega Superspeedway in Alabama; Michigan International Speedway in Michigan; Richmond International Raceway in Virginia; California Speedway in California; Kansas Speedway in Kansas; Phoenix International Raceway in Arizona; Homestead-Miami Speedway in Florida; Martinsville Speedway in Virginia; Darlington Raceway in South Carolina; and Watkins Glen International in New York. ISCA also owns Nazareth Speedway in Pennsylvania, which is classified as held for sale, and it has a 37.5% interest in Chicagoland Speedway and Route 66 Raceway through its interest in Raceway Associates.
ISCA's business principally consists of conducting racing events at its major motorsports facilities. In fiscal 2004, the company promoted more than 100 stock-car, open-wheel, sports-car, truck, motorcycle, and other racing events through motorsports facilities that it owned and/or operated, including 20 NASCAR NEXTEL Cup Series events, 14 NASCAR Busch Series events, 9 NASCAR Craftsman Trucks Series events, 7 Indy Racing League (IRL) IndyCar Series events, and the Rolex 24 at Daytona sanctioned by the Grand American Road Racing Assn.
We believe the quality of International Speedway's earnings is high. Based on S&P's Core Earnings methodology, we estimate S&P Core earnings per share of $2.85 in fiscal 2005 and $3.41 in fiscal 2006, compared to our respective operating EPS estimates of $2.86 and $3.41. In fiscal 2005, our S&P Core EPS estimate includes estimated stock-based compensation expense in excess of that reported on ISCA's income statement of approximately $180,000 (less than 1 penny per share). International Speedway doesn't have any pension or post-retirement benefit costs.
ISCA shares are up 3.9% so far in 2005, following 19% increases in both 2003 and 2004. The shares hit their 52-week high of $56.50 on Feb. 14, 2005, but have since fallen 3%. We believe the decline will prove short-lived and expect the shares to perform strongly in full-year 2005. The three NASCAR Cup Series events so far in 2005 have been very successful, with the Daytona 500, at an ISCA track, generating TV ratings of 10.9 households, an all-time high.
ISCA shares are currently trading at around 19 times our fiscal 2005 EPS estimate. Although this is a modest premium to the p-e of 18 for both the S&P 400 and the S&P Leisure Facilities Sub-Industry Index, we believe it's warranted by the high growth that we expect ISCA to exhibit. The S&P 400 trades at a PEG ratio of 1.3 and the Leisure Facilities Index trades at 1.7, compared with 1.5 for ISCA.
Our 12-month target price of $66 is based on a combination of our discounted cash flow (DCF), historical analysis, and relative valuation analyses. Our 10-year DCF model assumes a cost of capital of 7% and terminal growth of 3.5%, and yields a value of $66 per share. Our historical analysis applies an 11.5 enterprise value to EBITDA multiple to our fiscal 2005 EPS estimate and yields a value of $65 per share. Our relative valuation applies an enterprise value to EBITDA multiple of 11.6 our fiscal 2005 EPS estimate, in line with peers, and values the shares at $66.
We see several risks to our recommendation and target price. Adverse weather or other events could disrupt scheduled events. Since ISCA derives 85% of its revenue from the 20 NASCAR Cup series races that it promotes, canceling one of these races would have an adverse impact on ISCA's results.
NASCAR's popularity could wane. Although it has been generating strong TV ratings and track attendance, if its popularity should dissipate, ISCA's results would suffer.
Expansion plans may be delayed or may not be consummated. Without the additions of tracks in New York City and the Pacific Northwest by the end of the decade, we would expect earnings and revenue growth rates to slow significantly. It's possible that these projects will run afoul of local regulations or that ISCA won't be able to secure public financing for the infrastructure improvements that would be necessary to make such expansions practical.
ISCA's close relationship with NASCAR may cause antitrust concerns. Speedway Motorsports brought a lawsuit against ISCA and NASCAR, alleging that the pair operates in violation of competition laws and restricts NASCAR expansion to tracks owned by ISCA. To settle the lawsuit, ISCA agreed in 2004 to sell its North Carolina Speedway. If federal regulators push for more separation between ISCA and NASCAR, ISCA could lose some of its NASCAR events or be shut out of schedule expansions.
We believe ISCA shares are attractive for several reasons. We think the company's strong competitive position within auto racing, particularly its close relationship with NASCAR, will provide it with advantages that enable it to generate superior earnings. We also believe that NASCAR, in particular, and auto racing in general, will continue its ascension in the American sports universe, creating meaningful growth for the industry.
Furthermore, International Speedway, in our opinion, has the financial strength and flexibility to pursue expansion in a disciplined way. Finally, we view the shares as having a good balance of risk and reward, given the low volatility that they've exhibited.
McDaniel follows leisure and media companies for Standard & Poor's Equity Research Services