Is International Speedway Corp (ISCA) Undervalued?

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By Ben Strubel President of Strubel Investment Management ( a Registered Investment Advisor in PA that manages investment portfolios for clients using a value investing philosophy. He also publishes a monthly newsletter The Value Investor’s Edge.

The best type of business to own is a monopoly. Unfortunately, in the United States monopolies are not legal (and for good reason, monopolies are usually bad for consumers). There is one huge exception, professional sports organizations. The NFL, NBA, NHL, MLB, NASCAR, etc. have all been essentially granted de facto monopolies over their respective sports. Antitrust law is complicated and lawsuits have been brought against various sports organizations with varying success, but the vice grip of the leagues over their respective sports still remains. Wealthy investors can sometimes purchase a sports team, but smaller investors don’t have many options (unless you count buying a WBNA team, but, really, who wants one of those). One exception is NASCAR. While you can’t buy a racing team or invest in NASCAR itself, there are several publicly traded companies that own multiple racing tracks and host NASCAR (and other racing events). International Speedway Corporation (ISCA) is the largest of these. It is 38% owned by the France Family Group, the majority owner of NASCAR itself.

France Family Ownership
The France family is the majority owner of NASCAR itself and essentially runs the sport. The France Family Group also owns 38% of ISCA and holds many management positions within the company. On one hand, this creates many conflicts of interest. For example, how can they negotiate royalty rates for the tracks when the family is on both sides? On the other hand, there are powerful incentives for them to give preferential treatment to ISCA, since they run it and own part of it. The France family does not have a record of shortchanging ISCA investors at the expense of their holdings in NASCAR. In fact, there have been lawsuits alleging the opposite–that France has given preferential treatment to ISCA. In my view, the France ownership is neutral or a net positive.

International Speedway Corporation’s Business
ISCA has two main assets: its racing complexes and its race dates. ISCA has twelve racing complexes (counting both Chicago tracks as one) and twenty-one NASCAR Sprint Cup race dates. The real value for ISCA comes from a combination of the two. A top-of-the-line racing complex isn’t worth much without having popular races run on the track. Similarly, a NASCAR race date’s value is much less when run in a smaller complex.

Throughout this article I refer to racing complexes or racetracks as small or large. By this I mean the amount of seating, luxury boxes, media areas, fan entertainment zones, and so forth at the race track. I do not mean the length of the NASCAR track in miles. To determine the value of a racetrack, we look at the seating capacity, track location, and amenities, not the literal length of the paved track surface.  For instance, I refer to the NASCAR track in Bristol, TN as large because it has the capacity to seat more than 150,000 fans and has almost 200 luxury boxes. The length of the track, however, is only half a mile (one of the shortest in NASCAR).

ISCA’s twelve tracks are Daytona International Speedway, Talladega Superspeedway, Michigan International Speedway, Richmond International Raceway, Auto Club Speedway of Southern California, Kansas Speedway, Chicagoland Speedway (including the Route 66 Raceway drag strip facility), Phoenix International Raceway, Homestead-Miami Speedway, Martinsville Speedway, Darlington Raceway, and Watkins Glen International. These tracks have a total seating capacity of more than one million and 530 luxury suites.

There are three main factors weighing on shares of ISCA: declining popularity of NASCAR, the lingering effects of the recent recession, and the Motorsports Authentics (MA) joint venture debacle.

Motorsports Authentics (MA)
Let’s tackle the easiest one first, and that is Motosports Authentics (MA). MA a 50/50 joint venture formed between ISCA and Speedway Motorsports (TRK) that sells licensed motorsports merchandise (mainly NASCAR items). MA was formed as the result of purchasing the Team Caliber and Action Performance companies in 2005. First, here’s the bad news. From the start, the joint venture was a disaster, making money in only one of its years in existence. Right now MA is basically bankrupt. The good news is that only $5.5M of MA’s debt is guaranteed by ISCA and that debt guarantee will be dropped if certain provisions are met. Given the disastrous track record of MA, however, we will err on the conservative side and assume ISCA will have to make that payment. The second piece of good news is that besides the $5.5M mentioned earlier, shareholders buying into ISCA now are penalized by the MA mistake. Anyone who was an owner of ISCA in 2005 watched the company flush their proportional share of the $xxx used to set up MA down the toilet. For current shareholders, the company can’t lose the money it already spent, and the equity investment has been written down to $0 on the balance sheet. While the fate of MA won’t have a material impact on the company’s finances going forward, it has however, been responsible for numerous noncash charges appearing on the income statement over the past five years. In 2009, the company took one final noncash charge of $77.6M. The end to these noncash charges should also help the stock price recover as earnings will be more “transparent,” which everyone on Wall Street likes.

Declining Popularity of NASCAR
When discussing the popularity of NASCAR, it is important to keep one thing in mind. While NASCAR is declining in popularity, it is highly unlikely that the decline will last forever and that eventually no one will be watching NASCAR. Declining business is a scary word on Wall Street. But there is a big difference between businesses, such as Earthlink (ELNK) that provides dial-up internet access or US Mobility (USMO) that provides pager services, that may cease to exist and businesses that will exist with a reduced size. USMO and ELNK are likely eventually to end up with zero customers. NASCAR may no longer be as popular as it once was, but certainly a large number of fans will remain. The hard part is figuring out the size of a normalized fan base. One other thing to keep in mind is that revenue from TV networks is received under a multiyear contract. The current major TV contract does not expire until 2014.

As we discussed above, the main drivers of value for ISCA are the racetracks and the Sprint Cup race dates. The book value of ISCA is $1,157M, but that doesn’t tell the whole story. Many of the race tracks were acquired years or decades ago and are on the books for historical cost not what they are actually worth today. We want to know the value of those tracks today.

Luckily, there have been numerous private transactions involving NASCAR and ex-NASCAR tracks over the past ten years. But each track that was bought or sold was in a different location, was in a different condition, had a different size, and had a different number of Sprint Cup race dates. Also, the transactions occurred in different years. We can use the details of the tracks and transactions to construct a regression formula to estimate the value of ISCA’s portfolio of tracks and see how each variable affects the value of a track.

Our formula uses four variables. The first variable is the number of Sprint Cup events held at the track. The reason for including this should be obvious as Sprint Cup races are huge money makers, and Sprint Cup race dates that can be transferred to different tracks are very valuable as well. The second variable is the number of seats at the track. The reason for including this should be obvious as well as the number of seats is a good proxy for how much revenue in ticket sales and other merchandise will be generated at events. The third variable is size of the media market where the track is located. The reason for including this may not seem obvious at first, after all NASCAR is televised nationally. This variable basically helps to control for the value of the track without NASCAR. A large modern track in a large media market still has some value without NASCAR, while a large modern track in a small media market without NASCAR would be almost worthless. The fourth variable is the year. This variable is included to control for the popularity of NASCAR throughout the years. Twenty years ago NASCAR tracks and race dates changed hands for a lot less money than they did in the last few years when NASCAR was much more popular. Our model has a standard error of $25M, and our four variables explain 96% of the variation in values of NASCAR tracks.

Our formula says that in 2010 ISCA’s twelve tracks (we combined both Chicagoland tracks) would have a value of a little less than $3B. But there is one thing wrong with that estimate. First, NASCAR isn’t growing in popularity; it’s actually declining. So we shouldn’t use the year 2010 in our model. We should use a year in the past when NASCAR wasn’t as popular and expectations for growth were lower. If we use a year like 1990, we get a value of $2.4B. Turning the back the clock even farther to 1980 gives us an estimate of $2.1B for the tracks.

Let’s use the 1980 estimate to see what the value of ISCA. ISCA has current assets of $237M and other assets totaling $38M, with liabilities of $792M. Doing the math gives us an estimate of $1,883M or $39.2 for the value of ISCA ($237M+$38M+$2100M-$792M = $1583M). This is well above ISCA’s current market price of approximately $25.

There is one other thing to watch out for. It’s something our formula doesn’t take into account. ISCA and all other race complex owners will suffer from diseconomies of scale as the popularity of NASCAR drops. It costs about the same to run a racetrack and a race day event no matter how many people show up. Capital expenditures (excluding any major racetrack purchases) average about $106M per year for ISCA no matter the attendance or the revenue.

It’s a given that NASCAR popularity will decline from its lofty heights, the question is where will it bottom out? At late 2000 levels? At 1990 levels? At 1980 levels? It looks like the market has gone too far toward the pessimistic side, thinking NASCAR has a hopeless future. In my opinion, NASCAR (the racetrack companies at least) is a very attractive investment at these market prices as fears of NASCAR’s demise seem overblown. In my opinion, ISCA offers the best investment option. I do not like Speedway Motorsports (SMI) because of its higher debt levels and more aggressive partially debt-fueled expansion in the face of declining NASCAR popularity.

Disclosure: Both myself and my clients have no positions in ISCA or TRK

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