Report
Jaime Katz
EUR 850.00 For Business Accounts Only

Morningstar | Outcome of Acquisition Still at Large for International Speedway; Sport Demand Continues to Struggle

Narrow-moat International Speedway received a nonbinding cash bid for the acquisition of its Class A and B shares of $42 per share on Nov. 9, which represented an 8% premium on its prior market closing price at the time ($39.06). However, certainty surrounding the transaction remains elusive with a special committee and outside consultants evaluating the merits of the bid, with no offered timeline to its conclusion. As we noted previously, this was a mitigating factor that we believed could delay a formal bid, as the 11 times EV/EBITDA offer at the time was generally lower than the multiples we had seen offered on recent acquisitions in the consumer space. This could potentially press the price demand higher than the offer, resulting in the lack of a formal legal bid. For now, given the uncertainty surround the progress of the transaction, we don’t plan any material change to our $37 fair value estimate.

Our fair value estimate is predicated on flat admissions growth with 3% motorsport-related revenue growth, which embeds the existing broadcasting escalator. We believe there remains opportunity over the long term to reduce D&A expenses back to a low-teens percentage of sales, from around 16% over the last three years, which drives the majority of the gains in our operating margin forecast ahead. However, this will not begin in 2019, as the company’s guided operating margin of 13.5%-16% in basically flat at the midpoint to 2018’s 15% operating margin. Ultimately, this leads the company to generate an operating margin of more than 17%, a nearly 180-basis-point gain over 2018’s level.

In our opinion, results were mixed in the fourth quarter. While admissions and concessions continued to struggle, it was clear that corporate interest in the sport remains stable. On the corporate front, the corporate sales increased 1.7% for the year, and heading into the 2019 racing season, about 75% of the gross marketing revenue target has been agreed-to and only two NASCAR Cup series and two Xfinity race entitlements remain open, ahead of the three Cup and two Xfinity races the firm had left to fill at the same time last year. We expect this to remain healthy given the company’s leading sports property position on television (#2) and rising demand for content across both digital arenas. However, it remains abundantly clear that consumer demand continues to shift, with admissions down 25% in the quarter, largely impacted by the shift of the Chicagoland race from the fourth quarter of 2017 to the third quarter of 2018. On like-for-like race basis, admissions declined 12.5% with the average ticket price of grandstands for Cup events falling 1.8%, to $78.

Without getting viewers back to the stadiums and an inability to capture incremental benefits from digital rights currently, we think the firm will continue to struggle to generate ROICs that exceed the cost of capital and forecast average ROICs around 5% over the next five years. Despite this, the company continues to throw off positive free cash flow, which we anticipate will continue to be returned to shareholders by way of dividends and share repurchases to the tune of $280 million between 2017-21 (assuming an acquisition does not come to fruition).
Underlying
International Speedway Corporation Class A

International Speedway owns motorsports entertainment facilities and promoter of motorsports themed entertainment activities in the U.S. The company's motorsports themed event operations consist primarily of racing events at its motorsports entertainment facilities. The company conducts, either through operations of the particular facility or through its wholly owned subsidiary, Americrown Service Corporation, food and beverage concession operations and catering services, both in suites and chalets. The company's subsidiary, Motor Racing Network, Inc. creates motorsports-related programming content carried on radio stations around the country, as well as on a national satellite radio service, Sirius XM Radio.

Provider
Morningstar
Morningstar

Morningstar, Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. The company offer an extensive line of products and services for individual investors, financial advisors, asset managers, and retirement plan providers and sponsors.

Morningstar provides data on approximately 530,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 18 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services through its investment advisory subsidiaries and had approximately $185 billion in assets under advisement and management as of June 30, 2016.

We have operations in 27 countries.

Analysts
Jaime Katz

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