Nascar Prepares for 2011 Acceleration

Investors are too bearish on Nascar track owner International Speedway.
By Jake Lynch ,

BOSTON (TheStreet) -- As far as competitive advantages go, International Speedway (ISCA) - Get Report has among the best. The leading promoter of motorsports in the U.S., International owns 13 racetracks, including famed circuits Daytona and Talladega, and the annual events held at those venues. Morningstar awards the stock a superlative five-star rating and a fair value estimate of $38, suggesting 44% of potential upside. Other researchers dissent.

Of sell-side analysts covering International Speedway, which has a small-cap market value of $1.3 billion, two rate its stock "buy," four "hold" and one "sell." Morningstar, on the other hand, is on the hunt for securities that sell at a discount to their long-run intrinsic fair value. International's event-name recognition, pristine balance sheet and long-term media contracts make it a compelling stock. A declining fan base and revenue have put the shares on sale.

International hosts more than 100 events a year, generating revenue through ticket sales, merchandise, advertising sponsorships and broadcasting. Since most Nascar events sell out, growth will come from non-race utilization. Renting out the tracks for concerts and other events will be critical to success. The Nascar fan base has proven particularly sensitive to the downturn in employment, hampering International's pricing power. Since races require driving long distances and lodging for most fans, Nascar's lower-income base is less willing to shell out for costly races. Third-quarter admission revenue decreased 19%, confirming the longevity of this trend, even amid recovery. Ticket volume is being maintained by price cuts.

Also, International will have to renegotiate its media rights in 2014. Morningstar is forecasting a 10% drop in media revenue since Nascar television viewership is down over a three-year span and digital video recording, or DVR, decreases the likelihood that viewers will watch entire races. Still, International's cash flow and profit outlook are stable. Morningstar expects the operating margin to remain pegged at 21% over the next five years.

International Speedway Fundamentals

:

12-Month Sales Growth

: -5.8%

3-Year Annualized Sales Growth

: -7%

12-Month Net Income Growth

: 54%

3-Year Annualized Net Income Growth

: -12%

12-Month Stock Performance

: -8.6%

3-Year Annualized Stock Performance

: -14%

Quarterly Operating Profit Margin

: 14%

Industry Average Operating Margin

: 18%

International Speedway Valuation

:

Current P/E

: 26 (32% 5-Year Discount)

Forward P/E

: 16 (45% Industry Discount)

Sales Multiple

: 1.9 (33% Industry Discount)

Cash Flow Multiple

: 9.5 (35% Industry Discount)

Book Value Multiple

: 1.1 (82% Industry Discount)

Cost cuts have bolstered margins in recent quarters. International recently announced plans to shed $20 million to $30 million of operating costs in 2011. The France family has a controlling interest in International Speedway and Nascar, which has resulted in anti-trust litigation in the past. This is a risk, as conflicts of interest are possible. But, the family has been a competent steward of shareholder value in the past. Currently, the company pays an annual dividend. Last year's 16-cent payout translated to a yield of 0.6%.

The dividend has grown 17% over three years and 22% over five. Return on equity, at 4.2%, and return on assets, at 2.5%, are below respective five-year averages of 9.4% and 5.4%. The thesis for International Speedway is, to an unusual extent, predicated upon growth in employment due to Nascar's fan base. If certain forecasters are correct, and we face a structural, rather than cyclical, employment obstacle, then it may take longer for International Speedway to return to former levels of profitability, unless it's able to shift its audience.

-- Written by Jake Lynch in Boston.

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