Thesis: International Speedway Corp (ISCA) is in the business of promoting a sport in secular decline (NASCAR) through a medium in secular decline (cable/network TV). Conflicts of interest in its ownership/governance structurally handicap the public float, which in theory caps upside in the stock. Here’s why: The France Family owns NASCAR (private company) and a controlling stake in ISCA (~42% economic/~74% voting). ISCA owns the real estate (tracks), and NASCAR owns its brand and controls negotiations of the TV rights agreements that comprise the majority of economics accruing to NASCAR and its promoters and race teams (discussed in greater detail below). To the France Family, there is much more value in NASCAR (its brand and share of rights agreement revenue) than in its stake in ISCA (which is diluted by the public float). Therefore, NASCAR uses its controlling influence over ISCA to compel the near-complete reinvestment of ISCA’s cash flow into low/no-return capex programs. By its own admission, these capex programs deliver LSD/MSD% ROIC, at best. So, why would ISCA invest all of its FCF into these capex programs, rather than returning most of its capital to shareholders, which is the most appropriate use of capital given the mature and declining nature of its business? I believe the answer is that the France Family wants to lengthen the long-tail value of NASCAR, and refreshing ISCA’s tracks with ISCA’s capital is a way to do that, without any incremental investment by NASCAR or the France Family themselves. In other words, nicer tracks and a better fan experience slows the decline of NASCAR attendance and viewership; and even if ISCA shareholders don’t benefit (given no FCF), NASCAR does. Lastly, its worth noting that NASCAR fans skew to lower income demographics and travel hundreds of miles on average, in trucks and campers, to attend NASCAR races at ISCA tracks. Therefore, rising fuel prices are a meaningful headwind that has resurfaced over the LTM.
Valuation: ISCA currently trades at 8.3x mgmt’s 2018 EBITDA guidance (including cash flow from JV) and a 3% FCF yield. This is in the high end of ISCA’s historical 5.0-8.5x range. Given continued declines in TV ratings, falling attendance, and a generally more challenging environment for both NASCAR and linear TV, ISCA should trade at ~6x EBITDA, implying <$35/share (-30% downside).
Current Situation Overview: On July 5th, ISCA reported its second fiscal quarter earnings. The report was mixed, with sales beating slightly due to a $1.8mm insurance recovery, while admissions revenue posted its worst yoy declines since the recession (-10.4%). EBITDA was -4% yoy, and mgmt’s FY guidance implies ~flat yoy growth for EBITDA. In addition to weather, mgmt. noted “a general trend of lower sales at live sporting events” and “flat to down” pacing of forward bookings. Mgmt is investing in a $500mm capex plan through 2021, and an incremental >$100mm expansion of its Daytona property. On the earnings call, they stated: “While many components of these expected projects will exceed weighted average cost of capital, considerable maintenance capital expenditures estimated at approximately $40-60mm annually, will likely result in a blended return of invested capital in the low to mid-single-digits.” It is quite likely that some of this capex is catch-up of deferred maintenance capex, but also, much of it is discretionary. In any case, it delivers minimal returns, and would be better utilized for shareholder returns. Worth noting: there was an interesting long thesis in this stock a few years ago when it looked like ISCA may begin to generate FCF, following completion of its Daytona renovations. However, mgmt instead doubled-down on its M.O. of plowing all its FCF into capex, with questionable return/merit. Every indication is that mgmt will continue to deploy its FCF in this way, which benefits NASCAR but not the ISCA shareholders.
Business Overview: ISCA is a promoter of NASCAR races at tracks it owns around the country. Its tracks, which were opened as far back as the 1940s, host races that are televised pursuant to broadcast rights agreements. By far its most valuable property is the Daytona International Speedway in Daytona Beach, Florida. Approximately half of ISCA’s revenue comes from broadcast rights fees received from TV networks, by way of NASCAR. NASCAR negotiates these agreements and then allocates a share to the promoters, ISCA being the largest. Prior to 2001, individual tracks negotiated their own media rights deals. NASCAR began negotiating these deals on behalf of the promoters in 2001, and the initial deal was with Fox and NBC from 2001-06. That was followed by a deal with Fox/ABC/ESPN in 2007-15. And in 2015, a new deal was struck through 2024 with NBC/Fox. These rights deals provide contractual escalators of 3.8% per year. Another 15% of ISCA’s revenue is for corporate advertising partnerships. This piece of business is also contractual, but over shorter terms; and it has come under increased pressure in recent years (albeit still growing). From 7/5/18 earnings call: “Let's face it you know when Sprint was in the sport they were writing a check somewhere north of $75 million a year. And we as the industry don't know if that is viable going forward for long-term deals.” The remaining ~1/3 of ISCA’s revenue is admissions/food/beverage. This is where the secular decline of the sport is evident. Despite massive investment in the tracks, admissions revenue was down -5%/-2%/-6% in 2016/17/YTD’18. Food, beverage, and merchandise has followed this trend and is down -20% YTD. Each dollar of admissions revenue declines falls directly to the bottom line; and perhaps more importantly for the value of the business, these admissions declines speak to the declining terminal value for the stock and threaten to undermine TV rights negotiations when they come up in the future. As ratings and traffic declines continue, against the backdrop of linear TV disaggregation, it is difficult to see how future negotiations with networks will yield the same success. Regarding some the secular challenges facing NASCAR, its fan base is aging, and its stars have retired (Jeff Gordon, Tony Stewart, Dale Earnhardt Jr, Danica Patrick, etc). According to Nielsen, NASCAR has lost more than 45% of its TV audience over the past ten years. The ‘star-power’ problem may be remedied if up-in-coming drivers ascend, but the demographics of its fan base will be more difficult to address. In past generations, NASCAR fans grew up working on cars and had an interest in the vehicles. The advancement of technology in automobiles has meant fewer DIY mechanics, and therefore a breakdown in the relationship between NASCAR fans and NASCAR vehicles. Finally, the ‘growth in competition for eyeballs’ dynamic we’re all well aware of is especially acute here.
Financials: Despite contractually locked-in and growing (+LSD%) rights fees, ISCA has been a low/no growth business. 2018 EPS growth is driven entirely by tax reform. EBITDA guidance calls for ~flat growth yoy. Admissions declines underscore risk to the stock’s terminal value and argue for a sub-6x EBITDA multiple.
Capitalization: ISCA trades at 8.3x EBITDA, in the high end of its historical range. Its FCF yield is just 3% due to perpetually elevated capex spend. Its FCF yield could be in the MSD/HSD% if capex spend was trimmed to a more appropriate level, but I don’t believe that will ever happen given the conflicts of interest rife in the NASCAR-ISCA relationship.
Risks: The most compelling feature of this business is the contractually locked-in rights fees. This fee stream will buttress declines in attendance and F&B revenue. However, it is unlikely that the next renewal will yield terms nearly as favorable as the current deal. The current rights deal was inked in 2015. Obviously, the narrative around linear TV has changed meaningful over the past three years, and this will clearly continue. The secular threats to NASCAR are uniquely challenging, and they will leave NASCAR in a poor negotiating position for future renewals. Lastly, ISCA is a loosely followed and thinly traded name. Sometimes its trading activity seems to fly in the face of fundamentals. I believe that to be the case currently, as the stock is trading +MSD/HDS today, on a day when its earnings report clearly had more negatives than positives (and the stock is +20% YTD).
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Earnings declines as admissions declines accelerate
Multiple contraction as secular challenges become increasingly evident