Description

International Speedway Corporation owns the majority of the racetracks that are used in NASCAR races.  The company is majority held by the France family, who are the founders and current owners of privately-held NASCAR.  The company enjoys duopoly status in one of the nation's most popular sporting pastimes, with enormous barriers to entry that cannot be (logically) replicated.  40% of its revenues and a higher portion of its EBITDA are anchored by a television contract that extends through 2014.  The company's shares have been depressed significantly as a result of a sharp downturn in attendance and sponsorship.  Our thesis is that, even with another moderate step-down in results in 2010 (and some stabilization after this), the company is attractively valued based on its cash generation.  This valuation will be increased further by any (even small) uptick in attendance or sponsorship, which will flow directly to the bottom line.  If, as the country emerges from the downturn (and job creation occurs in earnest) NASCAR sees any meaningful return towards its former activity level, the upside is considerable. 

NASCAR may not be on the DVR schedule of much of the Wall Street crowd, but in most of the country, it is a big deal, second only to the NFL in terms of national sports ratings.  Why has the business suffered so dramatically since mid 2008?  If you ask the company, it is all about the economy and more specifically the unemployment statistics.  When the jobs come back they say, so will the fans.  There is some sense to that argument.  For example, in one of the most recent races in Martinsville, WV, local papers quote the unemployment rate in the area at a staggering 20%.   What else might be contributing?  Certainly if one visits online chat rooms or reads sporting rags, there a variety of potential culprits - lack of competition, varying start times, poor results from the biggest star (Dale Earnhardt junior), bad TV commentators, etc.  These may each have some degree of validity, but are quite difficult to assess in any systematic way.

Financials

With a brief review of the numbers, one can quickly observe:  (1) how the decline has closely followed the economic downturn, (2) the solid floor to revenues and cash flows provided by the tv contract, (3) the strong cash flow generation of the business, and (4) potential cash flow upside with just a modest uptick in results (see 2007/08).  Below are the company's most recent results and our 'base case' projections.

Business Segments

 Broadcast Contract: In 2009, ISCA generated nearly 40% of its revenue from a contract between NASCAR and several television broadcasting entities including FOX ABC/ESPN, Speed and TNT.  This revenue stream is contractually guaranteed (barring certain doomsday scenarios) to increase at approximately 3.5% per year through 2014.   Netting out prize money/fees and adding back the company-wide depreciation and amortization gives an EBITDA "floor" of approximately $180 million, or about 80% of EBITDA.  This clearly forms a very solid foundation for the company's revenue, profits and cash flow.

Attendance: It is no secret for ISCA followers or NASCAR fans that attendance is down.  Prior to 2008, any ticket at most races was difficult to obtain, and often purchased well in advance of the race.  As the economy sputtered in 2008, admissions started to dip, and in 2009 they were off 17% year-on-year.  ISCA has responded by cutting prices, offering introductory packages, etc.  The decreases have moderated somewhat, but have not reversed in recent quarters.

Sponsorship: Corporations pay fees to ISCA to sponsor races in a variety of formats.  They also pay hospitality fees to have events at the track sites.  These deals can last from 1-3 years. Not surprisingly, 2009 saw a significant pullback in these commitments, in particular, from beleaguered auto domestic auto manufacturers. Conversations with several key sponsors have reiterated their long term commitment to the sport, despite the short term uncertainty.

Food and beverage: ISCA sells concessions at the tracks.  As ticket revenues dropped, food and beverage dropped accordingly and then some, as fans economize at the track.  

Costs: In a nutshell, costs fall into three buckets: (1) fees tied to prize money, (2) costs to operate the track, and (3) corporate overhead.  The first is a relatively fixed number, and can be thought of as paired with the broadcast contract fees.  The second has a high fixed component, except in the food/bevg line.  Overhead is a largish number that, in our opinion, has some room for trimming (though we do not model this).

Balance Sheet

 ISCA has a conservative balance sheet, with approximately $175 million of net debt against $237 of TTM EBITDA.  There are also a few other nuggets of value in there.  One is the Staten Island property that the company is looking to sell.  In late 2009, it announced a preliminary deal (yet to finalize, status uncertain) at a price of $80 million.  If you add in the cash impact of the tax loss that the company will realize on the sale, that brings the total cash value to closer to $115 million.   This would bring the net debt to just $60 million. 

The company has additional value latent in its real estate holdings that are adjacent to the tracks.  For example, in Kansas, the company has entered into a JV with Penn Gaming to develop a casino hotel entertainment complex.  The company is contributing the land asset and $50 million in cash for a 50% stake.  Projections call for annual EBITDA from the property of $50 million.  We give this enterprise no value in our projections, (nor do we deduct the cash usage).

Cash flow

The company does have a meaningful amount of annual capital expenditures to maintain the tracks.  In its most recent call, the company called for 2010 capex at existing facilities to be in the $60-80 million range, This is well below prior years totals, which were inflated in due to the construction of a new company headquarters in Daytona.  With EBITDA in the $220 million range (and modest debt), the company generates significant cash flow.

Valuation

By our calculations, at today's share price ISCA is trading at approximately 5.6x EV/TTM EBITDA (if one includes the Staten Island value, 6.1x if that is given no value).  Looking forward, our base case (see above) reflects a continued sizeable drop in attendance in 2010 (approx 8%) followed by a stabilization in 2011 (but NOT an increase).  Food & beverage results follow similarly.  Sponsorship drops slightly less in 2010 (5%) and then flattens for 2011.  TV revenues increase as contractually mandated.  Overhead levels remain steady throughout.  By our calculations, this would result in 2011 EBITDA of $228 million. 

Adjusting enterprise value for the cash flow generated in the 2010-2011 period, and using the current stock price, the company would be trading at approximately a 5x EV/EBITDA multiple.  Historically, this multiple had been in the 8-10x range, and in our base case, we assume that this recovers from current levels to 7.0x. We consider this multiple reasonably conservative for a near-monopoly business with a high percentage of contractual revenues.  This results in a 2011 valuation of roughly $35 per share.  Any kind of meaningful recovery in the NASCAR business will result in significant upside from there.

*    Cash includes cash value of sale of Staten Island Asset ($80 mil sale + $36 mil cash tax benefit), restricted cash

**  Change in net cash from today to 11/11 due to 2 years of after tax cash flow from the business of approximately $160 million.

On the downside, in the medium term one simplified view is as follows:  As we mentioned previously, if one nets out the broadcast contract inflows and the prize money/fees outflows the result is roughly $110 million in EBITDA.  Add back the $70 million from depreciation and amortization expense and the total is $180 million of EBITDA.  So if ISCA can then operate the tracks (including overhead) on just a breakeven cash basis (a decent bet in our opinion), it is left with a $180 million EBITDA floor, or about 7.5x EV/EBITDA. 

Of course, in the longer run, the larger downside here is that the NASCAR woes are quite unrelated to the economy, but rather represent a fan base that has simply lost interest.  This would lead to continued declining revenues in 2011 and beyond, and while cash flow would have a floor beneath it through 2014, anticipation of meaningfully deteriorated terms in a 2014 contract renewal could dampen enthusiasm for the stock well in advance.

Conclusion

Overall, in our opinion, ISCA represents a compelling risk/reward combination for what is essentially a monopoly business with enormous barriers to entry, conservative balance sheet and a large portion of contractually guaranteed cash flow stream.  Its current difficulties are real and do not appear to be ending anytime soon.  However, we feel that the deep fan base and broad corporate interest are likely to see the sport through its current hard times.  We expect the first signs of stabilization in the business results (perhaps late 2010) to spur a return in the share price to the fundamental value levels that its cash flows justify.

Catalyst

-Sale of Staten Island

-Unemployment improvement