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NASCAR Track Owner Earnings On Tap; Declining Attendance Remains a Headwind

The world got the chance to see NASCAR’s Sprint Cup drivers race at Daytona this July 4th weekend. On tomorrow, investors get to see how well the company that operates the renowned Daytona track performed financially over the last quarter.

The Daytona track is owned by International Speedway Corp. (NASDAQ: ISCA). It reports its second quarter earnings for 2016 on Tuesday before the opening bell.

While investing in a race track may seem odd to some, track operators like International Speedway benefit from a wide array of revenue growth opportunities that contribute to their top and bottom lines. Furthermore, they pay dividends, which can be attractive in low yield environments like we are currently in.

 · What makes International Speedway attractive

Like all tracks, International Speedway’s tracks benefit from many revenue growth opportunities. Attendance at the NASCAR races may be the crown jewel, but the tracks’ revenues benefit from many other opportunities as well.

With a market cap of roughly $1.6 billion, International Speedway is the largest among its peers, which include Dover Motor Sports (NYSE: DVD) and Speedway Motorsports (NYSE: TRK). Their market caps are $79 million and $737 million, respectively.

Dover Motor Sports and Speedway Motorsports report Q2 2016 earnings by Aug. 1.
International Speedway boasts being the owner and operator of some of the most popular tracks in the NASCAR circuit, including the flagship Sprint Cup series. The tracks include Daytona International Speedway, Talladega Superspeedway, Darlington Raceway in South Carolina, and Watkins Glen International in New York. Also, it promotes more than 100 racing events a year.

Owning and operating these popular tracks contributes to International Speedway’s strong financials. For example, in addition to the revenue generated through admission sales, track owners and operators like International Speedway also derive revenue from hospitality rentals, souvenir and food concession services, royalties from trademark licensing, and sponsorship fees.

International Speedway also reaps the financial benefits of owning and operating 13 motorsports entertainment facilities, International Speedway also owns and operates Motor Racing Network, which it notes as being the nation’s largest independent sports radio network. It also owns Americrown Service Corporation, a subsidiary that provides catering services, and food and beverage concessions.

 · Financial performance

Analyst estimates show International Speedway’s reporting earnings per share of $.37 on $163 million of revenue for Q2 2016 on tomorrow. The reported EPS for the same quarter last year was $0.35.

The company has seen its revenues grow quarterly and annually over the last several years. Total revenues for Q1 2016 were roughly $143 million compared to revenues of about $137 million in Q1 2015.

Operating income was approximately $31 million during that period compared to approximately $22 million in Q1 2015.

During the first quarter of the year, International Speedway boosted its dividend. It pays $.41 a share, yielding 1.2%. For fiscal 2016, it plans to buy back $50 million of shares.

International Speedway is maintaining its market share. According to Capital Cube, the company’s revenue change during Q1 2016 is in line with the earnings reported for Q1 2015. Also, it is about average among its peer group.

The company’s earnings growth was influenced by year-on-year improvement in gross margins from 38.96% to 40.93% as well as better cost controls, notes Capital Cube. This resulted in an increase in its operating margins, which rose to just over 40% from 35% compared toQ1 2015 the same period last year. Gross margins increased to 39.59% from 36%.

 · Sponsorships

Crucial to the operators of these race tracks are their marketing partnerships, or event entitlement platforms. Examples include Coca Cola, which was the sponsor of the Daytona 400 over the weekend.

Race track operators tout these platforms as delivering solid returns on investments for the event partners by allowing them to extend their brands.

For fiscal 2016, International Speedway has agreements in place for approximately 92% of its gross marketing partnership revenue target, which is projected to increase approximately 11% compared to 2015.

 · Trickle down effects from NASCAR

After this 2016 season ends in December, Sprint will no longer be NASCAR’s flagship title sponsor. About eight to 10 companies are reportedly being considered. An announcement is expected in the fall.

For its secondary series, NASCAR signed on Comcast Xfinity to replace Nationwide. It signed a 10-year contract with the high-speed Internet provider in 2014.

According to Sports Business Journal, NASCAR is seeking a sponsor for its top-tier series for as much as $1 billion. That would cover 10 years, in which the sponsor would pay $45 million to $50 million annually in rights fees. That would be 33% more than the deal inked with Sprint (formerly Nationwide).

 · Elephant in the room

Trip Wheeler, president of Speedway Benefits, acknowledged the “elephant in the room” for NASCAR. He told Sports Business Journal that NASCAR needs to take a long-term view when weighing money versus what would be the right fit. He noted the conglomerate should worry more about getting ratings up and should even consider many of the changes it has made that has limited fan attendance growth.

This will indeed be key considering sponsorships have declined over the years. Not only has attendance at races been in decline, but so have television ratings as fans are tuning out. NASCAR has several initiatives under way to curb this trend, including those aimed at diversity to widen the fan base.

Companies are naturally unwilling to part with millions of dollars for sponsorships in the face of declining audiences.

 · Moving forward

As NASCAR works through these issues, tracks like International Speedway must be diligent in making sure there tracks remain profitable from other revenue sources.

I have little reason to think that the company’s momentum slowed over the last quarter. However, NASCAR’s attendance challenges are headwinds that cannot be ignored.

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