Note to Readers: This report contains substantially new material. Subsequent editions will have new or revised material highlighted.
Overview
Florida-based International Speedway Corporation (ISCA) is a motor sports themed amusement enterprise, furnishing amusement to the public in the form of motor sports entertainment. The Company's motor sports event operations consist principally of racing events at its facilities, which provide catering, merchandise and food concessions at all of the Company's motor sports facilities that host National Association for Stock Car Auto Racing (NASCAR) NEXTEL Cup Series events. The Company's other operations include the DAYTONA USA motor sports entertainment complex, Motor Racing Network, Inc. (MRN Radio), its 37.5% equity investment in Raceway Associates and certain other activities.
Recent Developments
ISCA recently reached a settlement with the CART Liquidation Trust that allows a claim of $2 MM inISCA’s favor in the CART bankruptcy. The claim relates to CART’sfailure to return ISCA's sanction fees paid to CART for a race in 2003. International Speedway hopes to recover the first $1.5 MM of theclaim in 2Q05, which would translate into roughly $0.02 per share.During the first quarter 2005, ISCA also signed multi-year entitlement agreements with the United Auto Workers and Ford for TalladegaSuperspeedway’s fall Cup event and with the Automobile Club of Southern California for California's spring Cup. ISCA expanded its Nextel relationship to include entitlement of Daytona's FANZONE and pre-race activities.
The company reported strong first quarter results. The quarter benefited from new multi-year official status agreements with several well-known companies, including Checkers/Rally's Restaurants, American Automobile Association, ConAgra Foods, Goodyear, and XM Satellite Radio. 1Q05 results also included the impact of renewed or expanded agreements with companies such as UPS and Valvoline.
Analysts have identified the following issues as critical to evaluating the investment merits of ISCA:
Strengths/Opportunities / Weaknesses/ThreatsStrong visibility and cash flow / Increase in motor sports related expenses.
Increase in motor sports related revenue due to increase in TV/Ancillary rights. / Moderate margins growth.
Broadening markets including NY and Pacific Northwest. / Materially lower annual escalators in a new TV contract for ’07 and beyond.
Continuing positive impact from realignment. / Increase in SG&A expense due to acquisition of Martinsville as well as the change in timing of the race schedule.
More information on the company can be found at its website:
International Speedway Corporation’s fiscal year ends November 30.
Sales
Total revenue for the first quarter was $179.4 million compared to revenue of $130.6 million in the prior-year period.
ISCA reiterated its FY05 guidance in the range of $705 to $725 MM. Management expects corporate sponsorship and hospitality revenue to be up low to mid-double digits in 2005. Additionally, management announced its plans to enter new markets including New York and the Pacific Northwest.
One analyst (William Blair) feels confident with the strengthening of sponsorship revenues and hospitality fees. The analyst opines that Broadcast revenues are expected to rise through contracts in FY05. Another analyst (CSFB) suggests ISCA has potential to grow its top-line steadily at the rate of 6-8%,given its relatively visible fundamental drivers including low single-digit attendance growth and high single-digit growth in motor sportsrelated revenue.
Sales2003 / 2004 / 1Q05 / 2005E / 2006E
NET Sales / $549.1 / $647.8 / $179.4 / $727.8 / $792.5
Digest High / $549.1 / $647.8 / $179.4 / $731.4 / $807.0
Digest low / $549.1 / $647.8 / $179.4 / $723.0 / $778.0
Digest Average / $549.1 / $647.8 / $179.4 / $727.8 / $792.5
YoY Growth / 18.0% / 24.5% / 12.3% / 8.9%
Margins
During 2Q05, operating income increased 54% to $71.8 MM and operating margin expanded 430 basis points (bps) to40.0%. Net interest expense declined to $2.1 MM from 4.3 MMyear-over-year due to anincrease in capitalized interest during the period and a lower interest rate on thecompany's new senior notes. Net income increased 70% to $71.8 MM and net margin increased 400 bps to22.9%.
Going forward, most analysts anticipate margins to expand modestly from the year-ago level. One analyst (William Blair) expects that the revenue shift toward higher margin motor sports-related revenues will enable operating margin to expand in FY05 and FY06. For FY06, analysts expect operating expense to grow more slowly than revenues.
Margins2003 / 2004 / 1Q05 / 2005E / 2006E
Operating / 34.0% / 35.3% / 40.0% / 36.1% / 37.6%
Pre-Tax / 30.6% / 32.2% / 38.0% / 35.2% / 36.7%
Net / 18.6% / 19.5% / 22.9% / 21.3% / 22.1%
Earnings per Share
For the first quarter of fiscal 2005, ISCA reported diluted earnings of $0.77 per share, compared to $0.52 per diluted share in the prior-year period.
The average of full year estimates for 2005 by the analysts included in our survey is a penny below the Zacks consensus number of $2.88 for the year. Individual analyst estimates exhibit a wide range of projections from a low of $2.80 (CSFB, William Blair) to a high of $2.94 (J.P. Morgan). For FY2006, analysts’ EPS forecast ranges from a high of $3.30 (A.G. Edwards) to a low of $3.04 (Smith Barney), with the digest average being $3.18.
Management has guided 2Q05 EPS in the range of $0.47-$0.49. For the full year 2005, management targets earnings in the $2.87-$2.93 range.
Target Price/Valuation
Of the seven analysts covering ISCA, twohave rated the stock as positive, while the rest hold a neutral view.
Analysts projected target prices range from $53 (CSFB) to $67 (Raymond James), with the digest average at $59. The analyst (Raymond James) on the high end of projections has used a multiple of 11x forward 2006 EBITDA to arrive at the valuation.
Rating DistributionPositive / 29%
Neutral / 71%
Negative / 0%
Avg. Target Price / $59.00
Long-Term Growth
International Speedway is well positioned to benefit from the growing popularity of live motorsports, its tight relationship with governing motor sport bodies and its ability to generate ancillary revenue from lucrative broadcast television contracts. Demographic trends bode well for increasing popularity of live motor sports with an aging baby-boomer population entering their prime leisure spending years. The company too enjoys a very close relationship with its most important content provider, NASCAR. Both NBC and FOX have signed broadcasting agreements with favorable escalator clauses that should provide material growth for the company’s motor sports division. Strong ratings and an improving economic outlook bode well for contract renewal negotiations. The long-term growth outlook at International Speedway appears strong at this juncture, with the company’s ability to generate incremental revenue from high margin broadcasting contracts in an improving economic environment. Analysts project a long-term growth rate in the range of 8% to 15% for ISCA.
Individual Analyst Opinions
POSITIVE RATINGS
Raymond James– Strong Buy – $67 price target
Anticipates higher revenue base, particularly in the motorsportsrelated business, in FY2005. Also, feels a slightly lower interest expense will help ISCA report a good FY2005.
William Blair– Outperform - No price target
Believes there is upside leverage to forward earnings estimate. Expects high-margin television broadcast revenue growth, race date realignments, and lower interest expense to provide stronger earnings growth going forward. Thinks the company’s strong free cash flow enhances the attractiveness of the stock.
NEUTRAL RATINGS
A.G. Edwards – Hold – No price target
Downgraded the stock from Buy to Hold. Thinks the shares are fully valued at the current level with limited chance of upside potential in the near term.
Bear Stearns – Peer Perform – No price target
The analyst maintainsNeutral outlook on the stock. Thinks the industry trends look very strong and are likely to continue in the coming quarters.
CSFB – Neutral – $53 price target
J.P. Morgan – Neutral – No price target
Expects an increase in corporate spending, well perceived seatexpansion, higher ticket pricing to benefit ISCA. However, remains wary of risks like inclement weather during a race event weekend, an attack on one of thecompany's tracks, or a decline in sponsorship that could affect profits. Believes the stock is fairly valued at the current level.
Smith Barney– Hold – $57 price target
Thinks the company’s dominant position as a trackoperator within the increasingly popular motorsports industry will bodes for ISCA in the current fiscal. Remains concerned about possibilities of poor attendance due to a continued weakeconomy and that TV contracts may not be renewed in 2006.
NEGATIVE RATINGS
None.