International Speedway (ISCA) is the undisputed king of motorsports, as it either owns or operates 13 motorsports entertainment facilities across the country. However, its finances tell a different story. Its profitability has taken a beating over the past years, with its gross margin declining from 56.1% in fiscal 2004 to 48% in 2013. Revenue growth has been relatively stagnant over the same period.
On the flip side, International Speedway has remained profitable in every single year of the past decade and the company was also free-cash-flow positive in nine of the last 10 years. While International Speedway isn't a high-flying growth stock, it could still fit the role of a stable investment in many investors' portfolios.
Recurring revenue
Motorsports compete with various forms of entertainment such as other racing events, as well as sports events such as football, basketball, hockey, and baseball. Hence, it isn't surprising that International Speedway's admission revenue has fallen by 34% from $196 million in 2009 to $130 million in 2013, as motorsports fans migrate toward other interests. International Speedway isn't the only one suffering; its peer Speedway Motorsports (TRK) registered admissions revenue which amounted to $116 million in 2012, its lowest total since 1998, according to The Charlotte Observer.
However, International Speedway has managed to offset the decline in admissions with a steady stream of recurring revenue from television and ancillary media as well as corporate partnerships, or sponsorships. This non-admissions revenue has in fact remained very stable for the past five years and now accounts for more than 70% of International Speedway's top line. Similarly, Speedway Motorsports derived 39% and 31% of its fiscal 2012 revenue from broadcasting and other event-related revenue, respectively. Despite declining admissions, motorsports draw high numbers of television viewers. For example, the NASCAR Sprint Cup Series drew in 70 million unique viewers in 2013, and household ratings even rose by 1%.
In August of last year, NASCAR, the industry body for motorsports, announced that it had signed a media rights agreement with Fox Sports Group which will start in 2015 and last through 2024. The estimated annual media rights fees of $820 million represent a 46% improvement over the yearly rights fees of $560 million for the 2007-2014 seasons. In addition, this is more than double the $400 million annual media rights fees paid for the 2001-2006 seasons.
The fee distribution structure remains the same, as promoter International Speedway will be entitled to 65% of the net cash proceeds from the gross broadcast rights fees allocated to the motorsports events. This will help extend International Speedway's revenue stability all the way until 2024.
Capital allocation
Growth (or the lack of it) isn't a sin, as long as you acknowledge it and return excess capital to shareholders. That's exactly what International Speedway has been doing.
International Speedway has been consistently raising its dividend by two cents per share each year since 2005. In 2013, it paid out a dividend of $0.22 per share which represented a dividend yield of 0.7%. In terms of share buybacks, International Speedway has repurchased 7.1 million Class A common shares for $268.3 million since the program's inception. Over the past decade, the company's shares outstanding have been reduced by approximately 13% from 53 million in 2004 to 46 million in 2013. As the number of shares outstanding decreases, existing shareholders will enjoy bigger portions of International Speedway's profits without committing additional capital.
Valuable real estate provides downside protection
International Speedway is trading at slightly above book value with a P/B of 1.15. About 70% of the book value of its assets derives from the motorsports entertainment facilities, buildings, and grandstands that it owns. Given that these properties are recognized at cost on the company's books, they are significantly undervalued relative to their market valuations. Similarly, another leisure facility operator, Vail Resorts, which owns and operates ski resorts, has a lot of undervalued assets on its balance sheet. This includes the land beneath its ski resorts, which is far more valuable than its book value. Furthermore, no new ski resorts have come on-stream for the past 30 years, which makes Vail's assets priceless because of the scarcity factor.
Foolish final thoughts
While International Speedway doesn't promise sky-high growth prospects, it boasts predictable revenue streams and a shareholder-friendly capital allocation policy. Moreover, with its current valuation slightly above its net asset value, there is significant downside protection given the undervalued nature of its motorsports facilities.
