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Montgomery Conference: NASCAR Stocks Stall Despite Growing Fan Base

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SAN FRANCISCO -- When

Speedway Motorsports

(TRK) - Get Speedway Motorsports, Inc. Report

gunned past analysts' second-quarter earnings estimate, it didn't matter. The company's stock skidded. Competitor

International Speedway

(ISCA) - Get International Speedway Corporation Class A Report

is also in need of a pit stop.

Manifold problems? Sort of.

Despite strong business fundamentals, both stocks are dogged by a long list of concerns, including the likelihood that they're spending too much on new racetracks. In addition, some investors remain uncomfortable with the companies' roller-coaster earnings, a product of holding big races one quarter but not the next. For instance, Speedway earned 67 cents a share in the second quarter, but is expected to post a loss of 2 cents a share in the third quarter. Then there's the simple fact that the stocks got ahead of themselves as fans rushed in the capture a piece of the growing

NASCAR

empire.

"There's a lot of expectation really built into these stocks, and they're spending a lot of money on new facilities and on buying facilities and the return is not there," says Stuart Linde, an analyst with

Gerard Klauer Mattison

, which hasn't participated in any underwriting for either company. Linde rates both stocks a hold.

Speedway no longer enjoys the limelight alone. When it went public in 1995, the company was pretty much the only NASCAR-related stock. But since then several others, including the once very thinly traded International, have issued shares to the public. "The scarcity value disappeared," says Tom Thomson, an analyst with Richmond, Va.-based

Wheat First Butcher Singer

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, which has participated in underwriting for Speedway but not International.

Daytona Beach, Fla.-based International, meanwhile, suffers because it was one of the last out of the gate, when so many investors already had tired of their NASCAR fix, says Thomson.

Speedway is trading at about 24 5/16, which puts its price-to-earnings ratio based on trailing 12-month earnings at 25. International is trading at about 21 1/4, putting its trailing P/E at nearly 32. The

S&P 500's

trailing P/E is 21.7.

While the stocks may have gotten ahead of themselves, "the fundamentals are absolutely superb," says Thomson. Both companies have "done everything they said they would do and more."

Concord, N.C.-based Speedway, for instance, saw earnings more than double to $29.3 million, or 69 cents a share, in the year's first six months, from $13.7 million, or 34 cents a share, in the year-earlier period.

Speedway Motorsports told investors Thursday at the

Montgomery Securities

conference here that its profit margin before interest, income taxes, depreciation and amortization is 50%, steep for any industry. Television money is flowing in. And the entire industry is getting a boost from cheesy television films that popularize the sport.

All this has some investors looking for the checkered flag. David Rocker, of

Rocker Partners

, says Speedway's stock is trading at a discount to its 1998 growth rate. "I'm still buying the stock because there are hidden revenue streams that aren't accounted for in the consensus analysts' estimate of $1.50 a share," he says. In particular, new television contracts should generate more money, and the company is negotiating naming rights to the different racetracks, which Rocker figures could add 20% to revenue next year.

But others aren't so sure. "I don't think anyone is going to post above-average returns," says Jim Larkins, an analyst with

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Wasatch Aggressive Equity fund, which has unloaded its Speedway shares. "There are three very well-capitalized, smart guys in this industry. No one is going to be able to do anything quietly and buy grandma tracks" for cheap prices.

Prices already are soaring. Speedway spent $140 million to $150 million on its new

Texas Motor Speedway

. Yet there are only so many big money-making races to go around. NASCAR, the National Association of Stock Car Auto Racing, decides which tracks get coveted

Winston Cup

dates. And Texas Motor Speedway has one but needs another. "Nothing short of a Winston Cup date in Texas will make that stock move," says Thomson.

Yet Speedway finds itself a bit the odd man out. International is controlled by the France family, which also just happens to control NASCAR. And International has joint ventures with the other big track operator --

Penske Motorsports

(SPWY)

.

Speedway "appears to be in an unfavorable position," says Thomson at Wheat First.

William France, who heads International and NASCAR, plays down the connection. "I don't know if it does help" International, he says.

At the same time, the joint ventures make some observers wonder whether International is doing enough for its own shareholders. "I'd prefer to see International do some things on its own for the sole benefit of its shareholders," Thomson says.