Current Price: $14.52
Speedway Motorsports is the owner/operator of nine race tracks used primarily for NASCAR events. TRK and International Speedway Corporation (NYSE: ISCA), the other major player in its business, together own the majority of the tracks used for major racing events in the US. The recession and a decline in NASCAR’s fanbase have eaten into both companies’ profits, but they have no realistic challengers within their industry and would benefit greatly from any expansion of consumer spending. TRK is by far the more attractively priced of the two, selling at a substantial discount to both its present net asset value and its historical P/B valuation.
Industry and Company Background
Between them, TRK and ISCA own 21 of the 29 tracks used by NASCAR (nine belong to TRK, twelve to ISCA). Most of the other tracks are individually owned by separate companies or by the smaller competitor Dover Speedway (NYSE: DVD), leaving TRK and ISCA with a duopolistic domination of the industry. Construction of new and competing tracks would require a substantial capital investment as well as the development of a sufficiently strong relationship with NASCAR to convince it to transfer existing events to a new site. The performance of Dover Speedway, which has lost money in four of the last five years and only rarely achieved a double-digit operating margin, demonstrates the daunting challenge that potential new competitors would face.
Any intense competition between the two leading companies is limited since races are distributed across the country and throughout the year. Operating margins for the two companies hovered in the 30%+ range from 2000 until the recession began to take a toll in 2009, suggesting that they both operate behind a substantial moat and generally do not poach business from each other. Although current earnings are disappointing compared to that history, it suggests that there is substantial upside for TRK when attendance and ticket pricing at its events improve. Investors appear to be pricing in a continuing decline in NASCAR’s overall popularity but much of the year-over-year revenue decline in event revenues in 2009 and 2010 actually came from reduced ticket prices (78% and 49%, respectively) rather than from reduced attendance. This indicates that increased consumer spending – eliminating the need for sales and special promotions – would significantly benefit TRK even without an increase in the fanbase. Broadcast revenues are tied to an eight year contract with four years remaining. Viewership is down 25% since the contract began, which concerns NASCAR, networks, and advertisers alike, but investors have less to fear. Not only has broadcast income remained relatively stable – actually increased slightly – due to annual rate increases within the contract but NASCAR is still the sport with the second highest television ratings (behind football) and plenty of time remains for NASCAR management to win back viewers before negotiating the new contract. Some simple changes could likely be made to great effect like rescheduling its Sunday events to avoid direct competitions for viewers with the NFL, provided management is willing to recognize these problems.
Although ISCA owns more of the iconic race tracks, such as the Daytona International Speedway, it sells at a premium that reflects its relative glamour. TRK currently has a market cap of $605M compared to a book value of $867M. ISCA sells for $1,350M with a book value of $1,187M. Even the chronically troubled Dover Speedway trades at a premium to book value.
The low valuation has two causes. First and foremost, TRK lost $10M in 2009 and only made $23M in the past year on lower revenue. The stock price has been in a steady decline since 2008 – despite strong performance in that year – presumably related to declining NASCAR viewership and investors probably take recent results to mean that those trends will continue. As I mentioned above, however, the competitive dynamics of the industry strongly favor the two major players and I expect profitability to return with time because of the greater role of ticket discounting in the revenue declines.
Second, the CEO, Burton Smith, owns 68.8% of the company. His large stake limits the size that outside investors can take and also prevents outsiders from exercising any say in the company’s affairs. Investors could view this as a negative, since it removes the possibility of takeovers or activist actions, but that hasn’t prevented them from attaching a much higher valuation to assets in the past:
Balance Sheet and Assets
Those assets are secure and unencumbered. Speedway Motorsports appears financially sound in the immediate future. Current and quick ratios are 1.67 and 1.46 respectively and have been increasing for several quarters. Debt/Equity is currently .72 as a result of the acquisitions of the New Hampshire Speedway and Kentucky Speedway tracks in 2008. The company does not appear interested in further acquisitions and is in the process of paying down debt.
Outstanding debt is primarily composed of two issues: $330M 6 ¾ notes due 2013 and $268M 8 ¾ notes due 2016. TRK has been reducing long term debt by $10-20M per quarter for the past year and is in the process of making a tender offer for the 2013 notes funded by a new offering of $150M senior notes due 2019. This aids in their ongoing de-leveraging, as much of the tender offer will be funded with cash, and indicates that the company continues to be able to access credit on favorable terms (6 ⅞%, according to speculation cited by Bloomberg).
By and large Speedway’s assets come in two forms: its race tracks and its race event sanctioning/renewal agreements with NASCAR. Both offer tangible sources of value to investors. The latter, though technically intangible, is a crucial part of TRK’s moat and preserves the company’s competitive position. The former provides a source of hidden value. Many of the tracks were acquired over a decade in the past at a significantly lower price than comparable facilities would cost today. The Bristol Motor Speedway, for example, was acquired for $26M in 1996. Infineon Raceway (formerly Sears Point) was leased with a purchase option of roughly $40M in the same year. Charlotte Motor Speedway was built by Burton Smith in 1959 and is the company’s original holding, so it too is likely carried on the books at a substantial discount to its current reproduction value. Figuring a precise reproduction value is complicated by the fact that the potential value of newly-constructed facilities might be somewhat lower than recently acquired facilities (like New Hampshire Motor Speedway) due to concerns about the sport’s popularity. Even so, the extraordinarily steep discount to even a pessimistic reproduction cost for facilities like Bristol or Charlotte suggests that book value probably underestimates true net asset value by at least $100-200M.
Cash Flows and Safety
Investors who fear that continuing declines in NASCAR’s popularity will cause earnings to languish should examine the current FCF production. Even in fairly poor years like 2009 and 2010, TRK had FCF of $95M and $94M (ttm) respectively. That equates to a current P/FCF of only 6.44x.
Free cash flows from the past two years are moderately inflated by lower levels of capital expenditure in the past two years. Management comments in the most recent filings suggest that capex will increase in the coming year as TRK renovates the Kentucky Speedway. The Kentucky Speedway project is the only non-routine capital expenditure that the company has planned and its budget of $60M is spread over several years. With that in mind, capital expenditures should not exceed depreciation in the coming years. Adjusting capex for 2010 (ttm figure) upwards to $50M still leaves a ttm FCF of $62M and a P/FCF of 9.87x.
It is also important to note that the loss recorded in 2009 was the result of a $76.7M impairment charge caused by the failed Motorsports Authentics joint venture with ISCA rather than a steep decline in the core business. The company had an otherwise profitable year. The carrying value of TRK’s investment in Motorsports Authentics is now $0, so there’s no risk of future impairment charges, and MA has renegotiated its license agreements on more favorable terms, allowing it to turn a small profit in the first nine months of 2010.
Speedway Motorsports offers potentially excellent returns to patient, value-oriented investors. Given the company’s strong competitive position and the effect of ticket discounting on revenues noted above, TRK will likely see a return to something approaching its past levels of profitability once consumer spending improves. Since its assets are valued near all-time historical lows there is significant potential for appreciation. In its heyday TRK had an average P/B ratio north of 2x. Coming this close to a recession and with questions about viewership retention, that would be an optimistic target. The five-year average is only 1.2x, a more modest and reasonable goal. Merely achieving 1x would still provide an acceptable return for conservative investors.
Given the uncertainty facing the U.S. economy today, I would hesitate to predict exactly when consumer spending would return to its former levels. Luckily, the mispricing here is extreme enough that substantial returns are offered even if the opportunity takes several years to fully work out:
(with dividends included but not reinvested)
|Time Span||Starting Value||Final Value at P/B 1x||IRR at P/B 1x||Final Value at P/B 1.2x||IRR at P/B 1.2x|
|1 Year||$14.52||$20.64 + $0.40||44.9%||$24.77 + $0.40||73.3%|
|2 Years||$14.52||$20.64 + $0.80||21.5%||$24.77 + $0.80||32.7%|
|3 Years||$14.52||$20.64 + $1.20||14.6%||$24.77 + $1.20||21.4%|
Even a protracted workout period with the most conservative target (three years to reach a P/B of 1x) provides an annualized return of 14.6% with a margin of safety provided by TRK’s already substantial discount to net asset value and powerful competitive position. Any of the more optimistic scenarios promise an annual rate of return above 20%.