Off to the Races!

You heard me right! If you want to find a valuable company that has a strong history and attractive fundamentals, I said off to the races! The company in question is none other than Speedway Motorsports (TRK), one of the largest operators of racetracks and a major player in NASCAR sanctioned events.

While the concept of NASCAR isn't all that appealing to me, I discovered that it is a surprisingly popular form of entertainment in the United States.  For instance, the Sprint Cup Series is, (according to Speedway Motorsports), the second most watched sporting event in the country with 70 million unique viewers in 2012 across 4.1 million households and 5.8 million viewers per event. The National Football League is first with an eye-popping 200 million unique viewers in 2012 (http://tvbythenumbers.zap2it.com/2013/01/03/nfl-2012-tv-recap-nfl-game-tvs-most-watched-show-all-17-weeks/163772/).  

Company data
On top of owning eight first-class racetracks, the company will host 13 Sprint Cup races in 2013. Additionally, it is slated to host 11 Nationwide Series events, as well as six Camping World Truck Series events (the number two and three most watched motor sporting events, respectively), as well as a slew of other racing events.

Adding to the legitimacy of the 900,000 seat enterprise is the fact that a reasonable portion of its revenue is predictable due to its share in large broadcasting rights agreements. These were negotiated by NASCAR and equated to $193 million of its $490.2 million revenue for 2012 (or approximately 39.4% of its annual revenue), which is set to rise to $199 million in 2013. You should know that FOX Sports, Sports Business Daily, and NBC Universal recently signed a deal that amounts to $8.2 billion in aggregate revenue for the industry extending from 2015 through 2024, of which Speedway Motorsports will receive a portion.

But of course, no matter how attractive all of this looks, it doesn't mean anything if it is lacking in fundamental strength. So, when it comes to fundamental strength, what's the verdict for Speedway Motorsports?  

When you look at the company's income statement, one thing should stick out, declining revenue. From at least 2008, revenue for the company has fallen almost every year from $611 million to $490.2 million in 2012. Although you would expect a healthy company affected by the financial crisis to be recovering, management has asserted the drop in revenue has been attributed to lower ticket prices following the crisis.

And that is because ticket prices follow economic downturns but are delayed since ticket prices are oftentimes sold in advance. Despite this, the company has still managed to pump out positive earnings with high margins in three of the past five years. More importantly, its average free cash flow margin from 2008 through 2012 has been a robust 15.2% (a number that has grown every year since at least 2008 except for 2010 compared to 2009). 

From a balance sheet perspective, the company has a relatively decent, though certainly not great, five-year average current ratio of 1.33, and a long-term debt-to-equity ratio of 0.71 (though this number has decreased at a fair clip to reach 0.59 in 2012, slightly lower than its 0.64 ratio now). To round out the balance sheet data, the company currently has a book value of $18.74, slightly below its share price of $18.57.

With that being said, we should keep in mind that book value is not always the best way to value a company.  As an example, if you remove the company's goodwill and other intangibles, it's actually only worth about $8 per share, so that number could be negatively affected by substantial write downs. Book value should be used as a potential sign of under valuation, not a definitive one.

Although these metrics are far from bad, how do they stack up when compared to some of the company's competitors? To evaluate this, I took two of the company's top competitors, International Speedway (ISCA), and Dover Motorsports and put them side-by-side, as shown in the table below.

As demonstrated by the table above, which has five-year averages for each metric being evaluated, and illustrates via a + or – the general five-year trend, Speedway Motorsports has more attractive free cash flow margins and is priced at a discount to International Speedway and Dover from a price-to-book standpoint. This indicates the company may be undervalued relative to its peers.

However, its current ratio is in the middle of the two others, while its long-term debt to equity ratio is the highest, suggesting that investors are more concerned about its solvency than anything, despite its solvency consistently improving. And, unlike International Speedway and Dover, its liquidity is improving.

To round things out, it also should be mentioned that the yield offered up by Speedway Motorsports is superior to it competitors as well, at an attractive 3.25%.  This compares to 0.69% for International Speedway, and 1.65% for Dover.

Summary
In Speedway Motorsports we have a company with so-so profitability due to economic uncertainty and a change in its own market economics with a shift taking place from in-person participation to at-home participation. While this may hint at lower revenue in perpetuity, I think the picture is made clear when considering it can pump out cash while improving solvency and maintaining stable liquidity. Although this is far from an ideal play, the prospects of Speedway Motorsports seem bright and the fundamentals reasonably strong, making it a valuable addition to any portfolio.