Speedway Motorsports Spins Out (News) November 5, 1999

Speedway Motorsports Spins Out

By Brian Graney (TMF Panic)
November 5, 1999

Race track operator Speedway Motorsports (NYSE: TRK) blew a tire and crashed headlong into the wall this morning after warning that it will report a loss for the third quarter. The company said its core NASCAR stock car operations continue to hum right along, pulling in record revenues and attendance figures. However, the other portions of the company's business have stalled, leading to quarterly earnings some $6 million short of expectations. Farther down the track, the company expects the same negative factors to weigh down Q4 net earnings by about $3 million. As a result, the company's shares were torched for a 35% loss this morning.

Before today's spinout, Speedway's share price had more than doubled over the past year on the back of the surging popularity of NASCAR in this country. NASCAR-sanctioned events made up 77% of the company's total revenues last year, but those revenues can be lumpy from quarter-to-quarter. Under the firm's accounting policies, the bulk of revenues -- namely, admissions and event-related revenues -- are not recognized until an event is held. During Q3, only one high-grossing NASCAR Winston Cup race was scheduled to be held on a company track, an August race at Bristol Motor Speedway in Tennessee. The company's Q2 and Q4 are the most important quarters in terms of profitability, thanks to a higher number of NASCAR races.

The company expected its other non-NASCAR events to pick up the slack during the period, but that didn't happen. About half of the Q3 shortfall can be chalked up to weak attendance at open-wheel Indy Racing League (IRL) events held at Atlanta Motor Speedway and Las Vegas Motor Speedway during the quarter. Bad weather at an NHRA drag race event, and expenses related to an industrial park owned by the company and the marketing of an environmentally friendly motor oil additive under development, also hurt results.

The company has put the industrial park, which was a tag-along item in its purchase of Las Vegas Motor Speedway, up for sale. In the meantime, the firm is required to pay operating expenses until a buyer is found. The motor oil additive business, which was acquired in 1996 for $514,000, is seeing losses prior to the retail launch of its main product next year. Why the company is in the motor oil additive business at all is a good question, although the original acquisition cost was not substantial. While it will be hard to analyze the eventual return the company will receive from the money it is sinking into the project, this is an area for investors to keep their eyes on, although it is a minor business segment.

More discouraging in the grand scheme of things is the IRL and NHRA results, which Speedway is taking actions to improve. "We plan to lessen the risk of financial losses from IRL and NHRA events by renegotiating our agreements with the sanctioning bodies and restructuring our events to ensure their profitability. These shortfalls should not occur in the future,'' said President and COO H.A. "Humpy" Wheeler.

Since the company's main business and value driver, NASCAR racing, is still in good shape and growing in popularity, investors are left to ponder whether the problems in the non-core business area are just short-term flukes or long-term speedbumps that will appear again and again with the monotonous consistency of stock cars circling the track. Based on the company's past performance, including 17 straight quarters of year-over-year revenue growth and a 26% compounded annual increase in operating income over the past three years, perhaps Speedway deserves the benefit of the doubt.

Trading at 25 times trailing 12-month earnings (which includes two seasonally strong quarters and two seasonally weak quarters) after today's fall, Speedway hasn't been priced this attractively for the better part of a year. Long-term investors willing to deal with the volatility associated with short-term variations in the firm's earnings may want to spend some time looking under Speedway's hood during the commercial breaks of this weekend's NASCAR Grand National race.

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