Racing for Growth

Being a Cubs fan, I can attest to the profit potential of the sports business, even for teams that consistently disappoint. Nothing is cheap once you're inside the turnstiles, but at the same time, it's all part of the experience. Besides baseball, there's another professional sport offering a nice trifecta of growing popularity, strong fan loyalty, and the ability to ride along as a shareholder: NASCAR.

I may not watch NASCAR much, but as an investor, I do try to profit from trends when I spot them. According to the Speedway Motorsports (NYSE:TRK) 2005 annual report, NASCAR's fan base includes one-third of the U.S. adult population. Some 58% of fans are between the ages of 18 and 44, 42% earn more than $50,000 annually, and 40% are female. Unlike more established professional sports, NASCAR is gaining fans. No wonder companies like UPS (NYSE:UPS) and SprintNextel (NYSE:S) are so eager to establish strong marketing relationships with racers and their fans.

Leading the pack
Speedway Motorsports and International Speedway (NASDAQ:ISCA) are the top two companies in the business of owning and operating racetracks. Dover Motorsports (NYSE:DVD) comes in third, but it's the smallest by far (with a market cap of only $212 million), it's the least profitable, and it shows no growth in terms of sales or operating cash flow over the past three years. For now, I'd disregard Dover as a long-term investment. At the two strongest companies, in contrast, sales growth is clearly ramping upward following a period of stalled growth in 2003:

Quarterly growth can be a little choppy, since some events that took place during one quarter last year fall into a different quarter the following year. For example, in 2004, Speedway Motorsports held five NASCAR-sanctioned events in the first quarter. But in 2005, one of those events fell into the second quarter, when eight events were held -- compared with only six in 2004's second quarter. Comparing quarterly results year over year can be a little tricky, but Speedway continues to host the same number of NASCAR events each year, while revenues grow at strong clip.

Of course, sales growth must translate into bottom-line growth, but that's not a problem for either of these companies:

While International Speedway consistently posts stronger margins, Speedway is steadily narrowing that lead. Both companies are also investing in future growth. Speedway is making improvements to its Las Vegas Motor Speedway to improve the experience for fans, while International plans to develop new racetracks in the Pacific Northwest and New York City areas.

Of course, constructing new racetracks, or investing in improvements at existing venues, is no cheap task. Both companies must borrow to fund these capital expenditures. International's 38.6% debt-to-equity ratio is completely reasonable, and while Speedway's ratio of 56.6% is on the high end of my personal preferences, I find it acceptable unless that ratio continues to grow.

What's a winner worth?
Concerning valuation, Speedway currently trades at 13 times earnings, while International's shares trade for nearly 16 times earnings. Both are growing between 10% and 15% a year. Since their P/E ratios barely exceed their earnings growth rates, both companies seem fairly valued.

Since I tend to lean toward the conservative side in estimating future growth rates, I'm projecting 8%-10% growth over the next five years. For one thing, racetracks rely heavily on tourists, and they're naturally affected by rising gas prices' constraints on discretionary spending. And with about one-third of adults in the country already counting themselves as fans, the sport's popularity growth is bound to find a resting point eventually. Analysts seem to be equally conservative about growth estimates for the three- to five-year time frame, although for what it's worth, both of these companies have beaten estimates in each of the last four quarters.

Assuming the market values these companies at around 16 times earnings, I see no problem with expecting International shares to trade around $70, and Speedway at $55, in three years. The shares are currently trading at levels that allow for decent appreciation during that time. I'd continue to watch both companies' debt levels in the face of rising interest rates, not to mention the effect of gas prices on tourism spending. But for now, it appears that NASCAR fans don't mind paying more at the pump -- which should help to keep both of these racetrack operators in high gear.

Coming out of the turn, it's further Foolishness:

• 4 Stocks That Took a Hike
• Why This Stock Is a Winner

Flag down fellow NASCAR-loving Fools on our Speedway Motorsports and International Speedway message boards.

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Fool contributor Jason Ramage looks forward to hearing your feedback. He owns shares of Speedway Motorsports. The Fool has a disclosure policy.